Wealthy Nations Daily Update - Oil and Growth

Data compiled by Bloomberg shows that the 838 companies which make up the MSCI Emerging Markets Index, on average, held a record $608 per share in cash or short-term investments at the end of last year. That’s up 34% from the previous year and the largest annual jump in over a decade.

This high level of liquidity is thought to come from delayed spending and reflects the growing concern for the outlook for world growth. We have particular concerns in regard to indebted nations, should a further downturn emerge and balance sheet stresses materialise.

Cooling growth in emerging markets and China’s attempted shift to a consumer driven economy has been named by the IMF as two of the three big adjustments the world is facing. In contrast, cash and equivalent holdings for companies in the Standard and Poor’s 500 index fell 2.8% last year which appears to be partly due to the massive share buybacks which have taken place in the US market-place.

Elsewhere, after a two-day rally last week that saw Brent crude prices rise by $5 per barrel to close at $31 on Friday, prices have fallen again this week. The ‘trouble’ is, the US is the swing producer and it doesn’t belong to OPEC. We often hear that the Saudis are trying to squeeze the Americans out of business, boosting supply further and further to gain market share. However, the Saudis do not appear to be doing much squeezing. Over the six quarters of 2014 and first half of 2015, US producers raised output 13 times more than the Saudis.

Saudi Arabian Oil Co, known as Saudi Aramco, Chairman Khalid Al- Falih said yesterday that they could sustain low prices for “a long, long time”. Aramco sees demand growing he said. The company isn’t responsible for current low crude prices, “there will be a period not far in the future where demand catches up with supply and inventories are worked out of the system”.

Aramco supplies all of Saudi’s crude oil and pumped more than 10 million barrels a day over the last ten months adding to the global oil glut. Aramco is studying various methods to remain as the region’s low cost producer and is looking at considering an IPO as Saudi as a country looks into privatising companies in all industries to fund the financial pressure the country faces from the fall in crude prices.