Oil Updates – prices climb ahead of US interest rate decision

Update Oil Updates – prices climb ahead of US interest rate decision
Brent crude futures for November were up $0.92, or 1.28 percent, at $72.53 at 6:22 p.m Saudi time. Shutterstock
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Updated 16 September 2024
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Oil Updates – prices climb ahead of US interest rate decision

Oil Updates – prices climb ahead of US interest rate decision
  • Federal Open Market Committee is expected to make a decision during its Sept. 17-18 meeting.
  • Investors are increasingly betting the US central bank will cut by 50 basis points

LONDON: Oil prices rose about 2 percent on Monday before scaling back as continuing disruption to US Gulf oil infrastructure balanced persistent demand concerns after a fresh round of Chinese data while investors await a likely cut to US interest rates this week.

Brent crude futures for November were up $0.92, or 1.28 percent, at $72.53 at 6:22 p.m Saudi time, having earlier risen by 1.96 percent. US crude futures increased by $1.16, or 1.69 percent, at $69.81 at 6:22 p.m Saudi time, after seeing a rise earlier in the day of 2.33 percent.

The market is likely to remain cautious until the Federal Reserve makes its interest rate decision on Wednesday, said Phillip Nova analyst Priyanka Sachdeva, adding that prices are still supported by some supply worries given that some capacity remains offline in the Gulf of Mexico.

Traders are increasingly betting on a Fed rate cut of 50 basis points rather than 25 bps, as shown by the CME FedWatch tool that tracks fed fund futures.

Lower interest rates typically reduce the cost of borrowing, which can boost economic activity and lift demand for oil.

However, a cut of 50 bps could also signal weakness in the US economy, which could raise concerns over oil demand, said OANDA analyst Kelvin Wong.

Saxo Bank analyst Ole Hansen, meanwhile, said activity is likely to remain light ahead of the Fed meeting, adding that the outcome “looks like a coin toss between 25 and 50 bps.”

Nearly a fifth of crude oil production and 28 percent of natural gas output in the Gulf of Mexico remains offline in the aftermath of Hurricane Francine.

Weaker Chinese economic data released over the weekend dampened market sentiment, with the low-for-longer growth outlook in the world’s second-largest economy reinforcing doubts over oil demand, IG market strategist Yeap Jun Rong said in an email.

Industrial output growth in China, the world’s top oil importer, slowed to a five-month low in August while retail sales and new home prices weakened further.

Oil refinery output also fell for a fifth month as weak fuel demand and export margins curbed production.

Brent and WTI each gained about 1 percent last week but remain comfortably below their August averages of $78.88 and $75.43 a barrel respectively after a price slide around the start of this month driven in part by demand concerns. 


Only 17 percent of chief economists expect strong growth in Middle East and North Africa in 2024-25: Report

Only 17 percent of chief economists expect strong growth in Middle East and North Africa in 2024-25: Report
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Only 17 percent of chief economists expect strong growth in Middle East and North Africa in 2024-25: Report

Only 17 percent of chief economists expect strong growth in Middle East and North Africa in 2024-25: Report
  • Growth perspectives are positive, but uncertain, for the MENA region, survey reveals

DUBAI: Almost half (48 percent) of chief economists globally expect moderate growth in 2024 and 2025 in the Middle East and North Africa region, according to the latest Chief Economists Outlook by the World Economic Forum.

Growth in the MENA region is expected to rise from 2.2 percent in 2024 to 4 percent in 2025, according to the International Monetary Fund’s projections.

Only 17 percent expect strong growth for the region this year and next, while 31 percent expect weak growth in 2024, and 34 percent expect weak growth in 2025.

South Asia has the most growth potential, as seven out of 10 chief economists expect strong or very strong growth in 2024 and 2025. The US also has a positive outlook, with nearly 90 percent expecting strong or moderate growth this year.

Europe, on the other hand, lags, with almost 69 percent of respondents expecting weak growth this year.

The report, released this week, is based on a survey of leading chief economists. It found that “easing inflation and strong global commerce” are the key drivers of “cautious optimism” for global recovery. 

However, elevated debt levels are a growing concern for both advanced (53 percent) and developing (64 percent) countries.

Geopolitical tensions are another potential source of macroeconomic shocks, with 91 percent of respondents saying they would undermine global collaboration efforts.

The various conflicts in the world, from Europe to the Middle East, have taken a humanitarian and financial toll on national economies. Although countries have managed to adapt to numerous geopolitical disruptions, it is not a cost-free process, the report said.

For example, shipping costs between East Asia and North Europe more than doubled between April and July 2024 following an increase in attacks on ships in the Red Sea.

And the latest World Investment Report cites worsening geopolitical tensions as one of the key drivers of a 10 percent slump in global foreign direct investment last year.

Global inflation continues to drop, with IMF projections showing full-year global inflation falling from 6.8 percent in 2023 to 5.9 percent in 2024.

Although the projections vary vastly between advanced economies (2.7 percent) and developing economies (8.2 percent), they remain above pre-pandemic levels.

The majority of chief economists (63 percent) expect moderate inflation this year in the MENA region, with this number growing to 68 percent next year. Roughly 20 percent expect low inflation in both years with only 11 and 15 percent expecting high inflation in the region in 2024 and 2025, respectively.

On the other hand, the proportion of respondents expecting high inflation in the US dropped from 21 percent in 2024 to just 6 percent in 2025.

Similarly, in Europe, expectations of high inflation dropped from 21 percent this year to 3 percent next year.

The survey points to a loosening of monetary policy over the next year, particularly in the US (91 percent), Europe (91 percent), and China (84 percent).

In the MENA region, 62 percent expect a loosening of monetary policy, while 35 percent expect it to remain unchanged.


Saudi banks positioned for 2025 profit growth amid interest rate cuts: Report

Saudi banks positioned for 2025 profit growth amid interest rate cuts: Report
Updated 41 min 28 sec ago
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Saudi banks positioned for 2025 profit growth amid interest rate cuts: Report

Saudi banks positioned for 2025 profit growth amid interest rate cuts: Report

RIYADH: Saudi banks are poised for a significant increase in profit margins in early 2025, driven by anticipated interest rate cuts that are expected to position them favorably against their Gulf counterparts.

A recent report from Bloomberg Intelligence highlighted the strengths of the Kingdom’s financial institutions, pointing out that they enjoy higher valuations primarily due to their reduced exposure to volatile markets.

Their conservative leverage not only positions them favorably but also allows for a strategic increase in profitability as interest rates decline.

Moreover, their adept management of the tax landscape enhances their competitive edge compared to other Gulf nations.

In addition to these factors, Saudi Arabia’s substantial role in a $2 trillion construction pipeline in the Middle East and North Africa region, which accounts for 34 percent of the total, indicates that the country’s banks will increasingly need to secure funding to support a variety of ongoing projects.

Following the US Federal Reserve’s decision on Sep. 18, the central banks of Saudi Arabia, the UAE, and Bahrain reduced their interest rates by 50 basis points, with Qatar cutting its deposit, lending, and repo rates by 55 basis points.  

This change signaled a shift in US monetary policy after two years of rate hikes aimed at controlling inflation.

Central banks within the Gulf Cooperation Council, including Saudi Arabia, typically align their policies with the Fed due to the peg of their currencies to the US dollar.

The analysts in the report predict that the Federal Reserve will implement a series of interest rate cuts, starting with a 50 basis point reduction in September, followed by 25 basis point cuts in the subsequent two meetings. This would total a reduction of 100 basis points for the year.

The reduction in interest rates is expected to support Saudi Arabia’s Vision 2030 projects and further accelerate non-oil activities. Businesses in capital-intensive sectors such as real estate, construction, and infrastructure are likely to benefit from cheaper credit, facilitating more aggressive expansion and investment opportunities.

Impact of oil price and government spending

The valuation of Gulf banks is influenced by several key factors, particularly oil prices and regional spending, according to the report. An average price of $80 per barrel is essential for maintaining liquidity in the Gulf banking sector, as it supports the economic stability and cash flow necessary for banking operations.

For Saudi Arabia, achieving budget balance requires an oil price of $108 per barrel, largely due to a substantial increase in public expenditure, which rose by $111 billion from 2016 to 2023. Including investments by the sovereign wealth fund in domestic projects, total spending has increased by $148 billion.

This spending surge is associated with various government initiatives aimed at promoting social and economic development. MEED’s July data reveals that Saudi Arabia leads with a project value of $680 billion within a $2 trillion construction pipeline set for the next five years, excluding energy-related projects.

The Public Investment Fund of Saudi Arabia, valued at $925 billion, reported a 29 percent increase in assets, reaching SR2.87 trillion ($765.2 billion) in 2023.

This growth is largely attributed to a strong emphasis on local investments. Allocations for domestic infrastructure and real estate development rose by 15 percent year-over-year to SR233 billion, while foreign investments increased by 14 percent to SR586 billion.

Simultaneously, the Saudi government has introduced new laws and reforms to stimulate and mandate domestic investment, aligning with its Vision 2030 initiative to diversify the oil-dependent economy.

With plans to invest approximately $680 billion in construction projects over the next five years, banks may need around $400 billion to finance 60 percent of this pipeline, relying on a mix of deposits and additional debt issuance.

Funding the growth

As reported by Bloomberg Intelligence, Saudi banks have issued $13 billion in debt by August, with $6 billion of that coming from sources excluding the Saudi National Bank’s certificates of deposits issued in Singapore. This amount surpasses the $11 billion in debt issued by UAE banks during the same timeframe.

Total debt issuance from Saudi banks is projected to reach at least $15 billion annually, supported by a diversified funding strategy that includes up to 15 percent from wholesale funding.

The last instance of Saudi banks outperforming UAE banks in debt issuance was in 2022, when tight liquidity and increased capital demand, particularly from the mortgage sector, were prevalent.

Bloomberg Intelligence noted that Saudi banks’ debt offerings are 3.7 times oversubscribed, compared to three times for their UAE counterparts. This indicates strong investor confidence and ample market liquidity, enabling Saudi banks to secure the necessary capital for expansion as the nation advances its Vision 2030 initiatives.

However, the report also pointed out a challenge: Saudi banks are dealing with a $4 billion currency mismatch, meaning they may have borrowed in one currency while managing assets or revenues in another, exposing them to financial risks from fluctuating exchange rates.

Moreover, heightened competition among Saudi banks has led to narrower spreads on corporate loans, making it challenging to impose higher rates. Although declining interest rates may improve these spreads, the high costs of liabilities compel banks to seek additional strategies to enhance the profitability of their corporate lending.

Shift to sustainable funding

Saudi banks primarily rely on wholesale funding from other banks and financial institutions; however, this source is deemed unreliable for long-term obligations, particularly those in foreign currencies.

Consequently, the report emphasizes the urgent need for Saudi banks to secure more stable, long-term funding options to support their operations and growth.

According to Bloomberg Intelligence, the share of wholesale funding in Saudi banks’ balance sheets has decreased from 15 percent in the fourth quarter of 2023 to 14 percent in June, signaling a shift in how banks are managing liquidity needs and reducing reliance on short-term interbank borrowing.

Additionally, UAE banks have extended liquidity support to Saudi banks through interest-bearing deposits, showcasing cross-border financial collaboration.

While unsecured debt constitutes only 3 percent of the banks’ assets, this figure has risen due to record debt issuance this year. This suggests that although Saudi banks are working to expand their debt profiles, a significant portion of their funding remains secured.

Furthermore, Tier 1 capital represents 2 percent of the balance sheet, indicating a stable capital position relative to total assets. Notably, Al Rajhi Bank and Alinma Bank have received considerable amounts in time deposits from other banks, which suggests variability in the amounts they can secure over time despite their engagement with wholesale funding.

Asset quality and profitability

Saudi banks are sustaining stable asset quality, with Stage 1 or good loans increasing to 93.4 percent in the first half of the year, up from 92.8 percent in 2023. This improvement is attributed to strong new loan origination.

The report indicated that write-offs and recoveries surged, peaking at SR6 billion in the fourth quarter, resulting in a decline of Stage 3 or bad loans to just 1.6 percent.

To mitigate potential risks, banks are bolstering their provision buffers, with coverage for Stage 1 loans rising to 45 basis points. The cost of risk improved to 34 basis points in the second quarter, exceeding expectations; however, it may increase in the latter half of the year if recovery trends falter.

In contrast, UAE banks, which experienced a significant boost in profitability last year, are likely to face a rise in their cost of risk as they adapt to a new corporate tax structure while striving to maintain their performance levels.

The introduction of a 9 percent tax, projected to increase to 15 percent in 2025, along with the potential for higher provisioning requirements in the future, presents challenges for these banks.

Saudi banks, on the other hand, are already subject to a 10 percent zakat tax but operate with lower leverage compared to their UAE counterparts. This reduced leverage positions Saudi banks favorably to enhance their return on equity if interest rates decrease.

While UAE banks managed to soften the impact of the corporate tax in their second-quarter financial results, their margins are under pressure, raising concerns about their loan recovery capabilities, which could affect bad-loan ratios.

According to Bloomberg Intelligence, Qatari banks are expected to maintain relatively stable margins, but their exposure to the real estate sector presents a risk to asset quality. A recovery in this sector could serve as a significant catalyst for enhancing overall stability and performance.

Fitch Ratings reported in August that the operating environment for Saudi banks is favorable, assigning them a score of bbb+, the highest among the banking sectors in the GCC.

This score is one notch above the ratings of its closest peers— UAE, Qatar, and Kuwait— and represents the highest score awarded by Fitch globally to emerging market banking sectors.

Fitch anticipated that Saudi banks will continue to grow at roughly double the average rate of the GCC, with projected financing growth of about 12 percent for 2024, compared to 11 percent in 2023.


At UN, Saudi Arabia calls for global collaboration at COP16 Riyadh to tackle land degradation

At UN, Saudi Arabia calls for global collaboration at COP16 Riyadh to tackle land degradation
Updated 27 September 2024
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At UN, Saudi Arabia calls for global collaboration at COP16 Riyadh to tackle land degradation

At UN, Saudi Arabia calls for global collaboration at COP16 Riyadh to tackle land degradation

RIYADH: Saudi Arabia has called on the world’s policymakers to urgently address land destruction and drought ahead of the 16th UN Convention to Combat Desertification COP16 in Riyadh in December. 

At the Kingdom’s “Road to Riyadh” event on the sidelines of the UN General Assembly, opened by Minister of Foreign Affairs Prince Faisal bin Farhan, Saudi Arabia urged delegates to prepare to take decisive action at the upcoming meeting, outlining a roadmap for international action and engagement and unveiling the thematic program for the COP.

According to a press release flagging up the gathering, every second an equivalent of four football fields of healthy land becomes degraded, totaling 100 million hectares every year.

Incoming COP16 President and Saudi Arabia Minister of Environment, Water, and Agriculture Abdulrahman Abdulmohsen Al-Fadley, said: “This is a pivotal moment for our planet. Land restoration is vital to securing a prosperous future for generations to come.”

He added: “It is crucial the international community unites to deliver ambitious and lasting solutions that curb land degradation, combat drought, and promote the sustainable use of natural resources.

“We must strengthen international cooperation to address the pressing environmental challenges facing our planet.”

The minister emphasized that Saudi Arabia's hosting of COP16, from December 2 to 13, reflects its commitment to environmental preservation and restoration, both domestically and internationally, citing initiatives such as the Saudi Green Initiative, the Middle East Green Initiative, and the G20 Global Land Initiative.

While land degradation trends vary across regions, UNCCD data warns that, if current patterns continue, the world will need to restore 1.5 billion hectares of degraded land by 2030 to meet the Land Degradation Neutrality targets outlined in the Sustainable Development Goals. 

In Riyadh, under Saudi Arabia’s Presidency of COP16, there will be a strong push for more concrete commitments to accelerate restoration efforts and meet this critical goal.

At the Road to Riyadh event, senior stakeholders from international organizations, government and civil society also addressed the growing need to increase ambition and address the global challenges caused by land degradation, including drought, food insecurity and forced migration, alongside the urgent need for multilateral action to tackle them.

UNCCD Executive Secretary Ibrahim Thiaw said: “Land degradation and drought affect nearly half the world's population, especially indigenous communities, smallholder farmers, women, and youth. 

“COP16 in Riyadh will be a pivotal moment to accelerate large-scale land restoration and boost drought resilience, with multiple benefits for people, nature and climate. 

“Our success depends on the ambition of all parties and our commitment to resetting our relationship with the land for future generations.”

According to the UNCCD, up to 40 percent of the world’s land is already degraded, directly affecting an estimated 3.2 billion people. At the same time, droughts are occurring more frequently and with greater intensity – up 29 percent since 2000. An estimated 75 percent of people globally will be affected by drought by 2050.


IMF official says Pakistan won more financing assurances from China, UAE, Saudi Arabia

IMF official says Pakistan won more financing assurances from China, UAE, Saudi Arabia
Updated 27 September 2024
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IMF official says Pakistan won more financing assurances from China, UAE, Saudi Arabia

IMF official says Pakistan won more financing assurances from China, UAE, Saudi Arabia
  • Nathan Porter says the three countries rolled over $12 billion in bilateral loans to help Pakistan
  • The IMF official describes Pakistan’s economic turnaround since mid-2023 as ‘really remarkable’

WASHINGTON: Pakistan has received “significant financing assurances” from China, Saudi Arabia and the United Arab Emirates linked to a new International Monetary Fund program that go beyond a deal to roll over $12 billion in bilateral loans owed to them by Islamabad, an IMF official said on Thursday.
IMF Pakistan Mission Chief Nathan Porter declined to provide details of additional financing amounts committed by the three countries but said they would come on top of the debt rollover.
“I won’t go into the specifics, but UAE, China, and the Kingdom of Saudi Arabia all provided significant financing assurances joined up in this program,” Porter told reporters on a conference call.
The IMF’s Executive Board on Wednesday approved a new $7 billion, 37-month loan agreement for Pakistan that requires “sound policies and reforms” to strengthen macroeconomic stability. The approval releases an immediate $1 billion disbursement to Islamabad.
The crisis-wracked South Asian country has had 22 previous IMF bailout programs since 1958.
Porter said Pakistan has staged a “really remarkable” economic turnaround since mid-2023, with inflation down dramatically, stable exchange rates and foreign reserves that have more than doubled.
“So what we’ve seen is the benefits of undertaking good policies,” Porter said, adding that the challenge now was to build stronger and sustained growth by keeping monetary, fiscal and exchange rate policy consistent, raising more taxes and improving public spending.
Last year, Pakistan achieved its first primary budget surplus in 20 years, and the program calls for growing that to 2 percent of gross domestic product. Porter said it depends in part on reforms to improve collections from under-taxed sectors such as retailers.
The next review of the loan would likely take place in March or April of 2025, based on end-2024 performance criteria, Porter said.


Oil Updates – prices dip on stronger supply prospects, China stimulus limits losses

Oil Updates – prices dip on stronger supply prospects, China stimulus limits losses
Updated 27 September 2024
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Oil Updates – prices dip on stronger supply prospects, China stimulus limits losses

Oil Updates – prices dip on stronger supply prospects, China stimulus limits losses

SINGAPORE: Oil prices eased for a third day on Friday and were on track to fall for the week as investors focused on expectations of increased output from Libya and the broader OPEC+ group, although fresh stimulus from top importer China limited losses.

Brent crude futures fell 20 cents, or 0.28 percent, to $71.40 per barrel as of 7:33 a.m. Saudi time, while US West Texas Intermediate crude futures were down 14 cents, or 0.21 percent, to $67.53.

On a weekly basis, Brent crude was set to shed 4 percent, while WTI was on track to slide 6 percent.

Though investors across asset classes cheered after Chinese authorities finally released bolder stimulus, oil markets seem fixated on Libya and OPEC this week, said Priyanka Sachdeva, senior market analyst at Phillip Nova.

“The recent decision by OPEC+ to ramp up production has only added to the gloom,” said Sachdeva, adding that the oil market has been struggling with weakening demand over the past few months.

“While it’s uncertain whether Chinese stimulus will translate into higher fuel demand, it may still offer some respite to the oil market.”

China’s central bank on Friday lowered interest rates and injected liquidity into the banking system as Beijing ramps up stimulus to pull economic growth back toward this year’s roughly 5 percent target and fight deflationary pressures.

More fiscal measures are expected to be announced before China’s holidays starting on Oct. 1, after a meeting of the Communist Party’s top leaders showed an increased sense of urgency about mounting economic headwinds.

Meanwhile, rival factions staking claims for control of the Central Bank of Libya signed an agreement to end their dispute on Thursday. The dispute had caused a sharp reduction in oil production and exports in the country, with crude exports down to 400,000 barrel per day this month, from over 1 million barrels last month.

The agreement could see more than 500,000 bpd of Libyan supply return to markets, ANZ Bank analyst Daniel Hynes said.

Separately, OPEC and its allies, a group known as OPEC+, are currently cutting oil output by a total of 5.86 million bpd but plans to reverse 180,000 bpd of those cuts in December.