The Daily Update - Oil inventory and shale impact

Oil continues its positive momentum with Brent crude futures touching $61.70 earlier today. Yesterday we wrote on the positive broader impact of this on the Middle Eastern exporters and particularly Saudi Arabia, and here write further on the likely direction of US government oil inventory data and the longer term impact of US shale production capacity.

Between now and the next OPEC meeting, scheduled for the end of this month, it’s hard to envisage any major developments from the region. With the recent success of Saudi and Russia agreeing to extend supply curbs, and adherence to OPEC production limits already surpassing 92%, they have played their cards as best they can and await the US oil industry’s response.

The Daily Update - The rise of the 'petroyuan'

The ‘petrodollar’ economy, set up in the 1970’s is coming under increasing pressure due to the expansion of the Chinese renminbi (yuan) usage in settling crude trades. The ‘petroyuan’ dates back only as far as 2012 when China signed a USD5.5bn currency swap agreement with the UAE whereby oil imports from Abu Dhabi would be settled in renminbi. Then in 2015, as a result of western sanctions, Russia began accepting yuan payments for all its oil exports to China; also considered an incentive to attract Chinese business away from Saudi Arabian oil imports which are priced in dollars. This trade works in both economies’ favour as Russia would rather purchase goods and services from China than go to the market and exchange the yuan.

The Daily Update - Saudi Arabia

Earlier this week, the Saudi Government issued its first riyal denominated sukuk which comprised 3 tranches (3, 5 and 7 year maturities) and raised SAR 17bn (USD4.5bn).  The issue was well received with SAR 51bn of orders: last year the government had focused its domestic fund raising in the conventional bond segment and the April issue of USD9 bn was an international sukuk so there was a lot of pent up demand for a domestic sukuk.

The Daily Update - Oman's push to diversify

At the end of last week Standard and Poor's downgraded the Sultanate of Oman’s sovereign rating one notch to BB+, citing a reduction in the nation’s net external asset position; as a result of falling oil prices. Oman is still rated investment grade (IG) by the other two main rating agencies, Baa1 (stable) by Moody’s and BBB (stable) by Fitch. As IG indices require a minimum of two IG ratings (from the three main agencies) for bond inclusion, coupled with the fact that Oman’s sovereign curve already trades relatively wide on a rating basis, our positions saw limited price action. Please note however, that we do not look to the IG indices for guidance on holdings, in fact a number of our holdings across the portfolios are not included in such indices; rather we look for relative value, spread cushion and ownership strength.

The Daily Update - UK productivity disappoints

A lot of things have happened in the last decade; but productivity growth in the UK doesn’t seem to be one of them. The latest Q1 2017 flash estimate for quarterly productivity growth from the UK’s Office of National Statistics (ONS) came in at -0.5%. This is just enough to bring the index level back to 101.8 – in line with where it was back in Q4 2007… Yes it has been that long since the Global Financial Crisis (GFC). Now, with just 3 more quarters of the same mediocre performance (as can be expected in many countries including the UK), a number of countries will be able to join Japan in the ‘lost decade’ camp.

The Daily Update - Belt and Road initiative / Oil

It’s being called the ‘Project of the Century’ that will bring a new ‘golden age’ of globalisation. The ambitious plan is to link China to the world via the ancient trade routes. The ‘Belt and Road initiative’ is designed to recreate the old trading routes both at sea and overland with huge investment in infrastructure along the route. The numbers are mind boggling; the USD900bln plan will take in 65 countries, connecting over 60% of the world’s population as well as over 30% of global GDP.

The Daily Update - Saudi Arabia and oil

Last weekend King Salman of Saudi Arabia put out a royal decree which has rescinded salary cuts and reinstated bonus payments to thousands of civil servants; around two thirds of the population work for the state. The official line was that the reinstatement reflects an improved fiscal position with the deputy economy minister, Mohammad al-Tuwaijri, saying the first quarter deficit was SAR26bn against projections of SAR54bn.  The salary cuts are estimated to have saved SAR36-40bn since last October.

The Daily Update - Oil OPEC Fed

The big news at the weekend that Theresa May owns a £995 pair of leather trousers was overshadowed by news from OPEC. Saudi Arabia announced agreement for production cuts starting January with oil minister Khalid Al-Falih reporting that Saudi will ‘cut substantially to be below’ the target agreed last month. Brent rose to hit $57.89 up 6.4% in early trading and is now up around 20% from November when the agreement was first announced.

The Daily Update - NBAD-FGB merger, Saudi oil and Russian bonds

Reports this week suggest that two of largest state-owned banks in Abu Dhabi are looking to merge; National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB). According to those in the know, the merger could lead to the creation of a bank with a market cap just under USD30bn, larger than that of Standard Chartered and Deutsche Bank for example. The NBAD-FGB tie-up would see combined assets of ~USD171bn, according to Q1’16 figures. If the merger goes through, the combined entity could be the MENA region’s largest bank in terms of assets, ahead of  QNB, which recorded assets at USD150bn in Q1’16.

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