Oil prices swung on Wednesday, losing earlier gains, and slumped to six-month lows as investors weighed fall in US inventories against recession fears hitting demand and the possibility of supply increasing if Iranian oil resumes entering global markets.
Prices rose in the morning session as US crude inventories fell by about 448,000 barrels for the week ended August 12. They then declined but pared losses later in the day.
Brent, the global benchmark for two thirds of the world's oil, was trading 1.41 per cent higher at $93.64 per barrel at 10pm UAE time on Wednesday. West Texas Intermediate, the gauge that tracks US crude, was up 1.73 per cent at $88.03 a barrel.
"There are growing downside risks as a result of the growth outlook and ongoing uncertainty around Chinese Covid restrictions," said Craig Erlam, senior market analyst, UK and Europe, Middle East and Africa, at Oanda.
China, the world's second-largest economy and a top importer of crude, continued to carry out strict movement restrictions to stem the spread of the coronavirus. The country cut lending rates on Monday to revive demand as the economy slowed unexpectedly in July, with the factory and retail activity slumping under Beijing’s zero-Covid policy.
The International Monetary Fund this month lowered its growth forecast for the global economy to 3.2 per cent this year, from its previous forecast of 3.6 per cent in April, due to Russia’s war in Ukraine that has exacerbated inflationary pressures and derailed the momentum of the recovery from the pandemic and the slowdown in China.
Progress made on the Iranian nuclear deal is also affecting oil prices.
The US on Tuesday said it was studying the Iranian response to a European Union proposal to revive the 2015 nuclear deal, named the Joint Comprehensive Plan of Action, which was abandoned by former president Donald Trump in 2018.
“It will require some time to digest what has been provided to the EU and in turn what has been provided to us,” US State Department spokesman Ned Price said.
The deal would help Iran to pump more oil into the market and ease the supply crunch caused by Russia’s military offensive in Ukraine and subsequent sanctions imposed by the US and the UK on the import of Moscow’s crude.
“There is one particular event that is driving the price of oil the most and that is the progress made on the Iranian nuclear deal," said Naeem Aslam, chief market analyst at Avatrade.
“Yesterday, the EU called the dialogue highly constructive and that is sending a signal to the market that it may be only a matter of time before Iranian oil returns to the market.”
The Iran nuclear deal could be a "big positive for oil supply and, therefore, a negative for prices", said Mr Erlam.
"There is no shortage of scepticism around the prospects for the JCPOA to be revived though, but we may be reaching a point where that will become clear," he said. "For now, Brent appears to have decent support at around $92."
A revival of the nuclear deal between the US and Iran is expected to add 4 million barrels of Iranian oil per day to the market to ease supply concerns, said Ipek Ozkardeskaya, an analyst at Swissquote Bank.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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