The UAE economy can expect a brief dip in confidence from local investors in the coming months, analysts have warned, after an International Energy Agency report forecast a drop in world oil demand growth, stoking fears of a global downturn.
The IEA cut its forecast of 2008 oil demand growth and pinned the expected fall on slowing world economic activity caused by US financial woes taking root elsewhere in the world.
The agency, which advises 27 industrialised countries, said growth would average 1.67 million barrels per day (bpd), down 310,000 bpd from its previous estimate.
Demand has been projected as 2.2 per cent last July, but IEA revised this down by about 200 kilo barrels per day in 2008 to 1.9 per cent.
Aalaeddine Chahbi, a hedge-fund manager for Evolvence Capital, said sentiment of local investors in the UAE and GCC would be initially affected, but the absence of substantial foreign underlying funding meant the economy was well-placed to weather any knock-on effects of a drop in oil demand growth.
“There might be a psychological reaction locally in terms of the amount of investment in the economy, which will probably ease relatively. Financial markets might feel this as well because of the correlation to the global economy. But this will be a short-term reaction. I don’t think the UAE economy will be impacted in the medium term,” said Chahbi.
“The economy is insulated because the underlying investments and main cash flows are coming from the region itself. It’s almost a self-sustainable economy.”
The possible slow down in local investment as a result of “global cooling in activity and business” will not remain for long, he added.
The UAE’s increased production levels over the past few months helped ensure January’s Opec crude supply was unchanged from December, at 32.0 mb/d.
Angola, Saudi Arabia and Kuwait also helped boost the oil supply, but levels were offset by lower volumes from Iraq, Nigeria, Qatar and Indonesia.
Lawrence Eagles, head of the IEA’s Oil Industry and Markets division, said: “It’s a big shift in demand growth.
“A little bit of that is due to higher demand in 2007, but the biggest chunk is because of the weaker economic growth, mainly in the developed economies and particularly in the United States.”
The reduction follows a lower growth forecast from the IMF, which last month cut its global 2008 growth projection to 4.1 per cent, a marked slowdown from last year’s 4.9 per cent pace.
Economic recession in the United States – the world’s top oil consumer – will be significant and will last for some time, IMF Managing Director Dominique Strauss-Kahn said on Monday.
While oil demand is slowing, risks to supply from Nigeria to Venezuela have helped prices rise to around $93 a barrel from a dip towards $86 last month. The IEA said inventories are low and need to rise.
Chahbi warned local investors with exposures to global markets to be vigilant about the side-effects of a drop in oil demand growth, and what this meant for an economic slowdown.
“Companies here that are diversified globally in mature markets might feel the global recession. And although foreign investment in local markets only accounted for three to five per cent of market capitalisation, they often represent up to 30 per cent of the turnover in the market.”
He said this would mean local markets would be more exposed to correlation with global markets, adding: “The correlation is not due to the investment, it’s due to investors. That is why the economy is not correlated because the majority of investors fuelling corporate growth here are not dependent on the global economy.
“Most of their growth is coming from the local market and this growth will remain strong.”
Chahbi said: “I think over the coming years we will see more global actors coming to invest in the region because it is one of the rare places that is insulated from the global recession.
“And we are already seeing capital relocation taking place in the UAE.”
The UAE’s oil production levels in January stood at 2.59mb/d, up from 2.54mb/d in December. The country’s current target this year stands at 2.57mb/d.
Chahbi, in light of the IEA’s forecast cut of 2008 oil demand growth, said: “I don’t think there will be a significant impact on the UAE’s oil production as a result of the cut in demand.”
Meanwhile, the price of oil rose above $93 a barrel yesterday as concerns over Venezuela’s move to halt shipments to US oil major Exxon Mobil offset expectations for a build in crude stocks in the world’s largest oil consumer market.
US crude climbed 44 cents at $93.22 a barrel by 1035GMT, while London Brent crude rose 61 cents to $93.47.
President Hugo Chavez’s decision to cut oil exports to Exxon Mobil on Tuesday came after the largest company in the United States won a court case freezing $12 billion of Venezuela’s overseas assets in a fight for compensation after the Chavez’s government seized a huge oil project last year.
“I think these prices reflect some short-covering in the market, but I don’t see these conditions as something that will continue long term,” said Kaname Gokon, deputy general manager at Okato Shoji Co’s research section.
Top global oil producers have assured the United States they can make up for a major supply disruption should Venezuela cut exports. Analysts also forecast a 1.8 million barrel increase in gasoline stocks, while distillates are expected to drop 1.4 million barrels.
After surging to a record high of $100.09 on January 3, oil has traded in a narrow range near $90 a barrel as fears of a US recession weighed on prices.
The IEA report also found that crude oil prices were little changed from mid-January at just above $90/bbl, although global economic worries continued to cast a pall over the prospects for demand growth.
The IMF revised down GDP growth figures for the United States, while a steady stream of bearish data on consumer and business confidence and jobless claims pressured prices and caused large day-to-day swings.
“To offset the negative economic trend, the US Federal Reserve made two aggressive interest rate cuts totalling 125 basis points, eventually followed by the Bank of England,” according to the IEA report.
200kb/d: Global oil product demand has been revised down by the International Energy Agency in 2008
1.9%: The expected global oil demand growth for 2008 – which was projected at 2.2 per cent last July
32mb/d: The UAE’s increase production levels helped ensure January’s Organisation of Petroleum Exporting Countries (Opec) crude supply was unchanged from December, at 32mb/d
2.59mb/d: The UAE’s production levels in January stood at 2.59mb/d, up from 2.54mb/d in December. The country’s current target for oil production is 2.57mb/d
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