Oil prices rose on Friday and posted the biggest weekly gain since October due to fears about Red Sea supply disruptions, although Angola's departure from Opec is likely to have a limited impact on the market, analysts said.
Brent, the benchmark for two thirds of the world's oil, edged down 0.40 per cent to settle at $79.07 a barrel. West Texas Intermediate, the gauge that tracks US crude, closed down 0.45 per cent at $73.56 a barrel.
Oil prices tumbled on Thursday, with Brent falling by as much as 2.4 per cent before cutting some losses and settling 0.39 per cent lower at $79.39 a barrel. WTI closed down 0.44 per cent at $73.89 a barrel.
Angola, Africa’s second-largest oil producer, announced on Thursday that it was leaving the oil producer’s alliance, following a dispute over production quotas.
“We feel that at the moment Angola does not gain anything by remaining in the organisation and, in defence of its interests, it has decided to leave,” Diamantino Azevedo, Angola's Minister of Mineral Resources, Petroleum and Gas, was quoted as saying by local media.
Angola, which joined Opec in 2007, produces about 1.1 million barrels of oil per day, compared with Opec's production of about 28 million bpd.
The country’s exit will reduce Opec's membership to 12 countries and its crude oil production to about 27 million bpd, or some 27 per cent of the global oil market.
Last month, Angola was given a target of sticking to 1.11 million bpd of output in 2024.
“Angola’s departure from Opec is the result of a long disagreement over the quantum of crude oil that it can produce,” said Ehsan Khoman, head of commodities, ESG and emerging markets research at MUFG.
“The country is mired with wide fiscal and external imbalances and underline the government’s resolute vigour in maximising output.
“The challenge remains on reversing the years of underinvestment that have resulted in around 40 per cent production declines in 2008.”
Angola’s departure may result in greater flexibility among the remaining Opec members regarding their production levels next year, analysts said.
However, it may also raise speculation about the possibility of additional countries leaving the group.
The African country’s decision will likely have “limited” impact on oil markets, said Edward Bell, head of market economics at Emirates NBD.
“While the major producers in Opec+ have all committed to deepening or extending their production cuts into the first quarter, compliance among those members will be key to have an effect on oil market balances.”
Brent is down nearly 4 per cent since Opec+ members announced voluntary output cuts of 2.2 million bpd on November 30.
Saudi Arabia, the group’s largest producer, extended its voluntary cut of 1 million bpd until the end of March next year.
“If there is weak compliance and oil prices are at risk of dropping further, then some sort of enforcement mechanism may need to be introduced and risk the integrity of the producers’ alliance,” Mr Bell said.
Mr Bell’s view was echoed by UBS strategist Giovanni Staunovo.
“From an oil market supply perspective, the impact [of Angola's exit] is minimal as oil production in Angola was on a downwards trend,” Mr Staunovo said.
Prices fell on Thursday on concerns regarding Opec+ unity, but there is no indication that more heavyweights within the alliance intend to follow Angola’s path, he said.
Meanwhile, Germany's Hapag-Lloyd and Hong Kong's OOCL have joined a growing list of major shipping companies that have said they would avoid the Red Sea, in response to attacks on shipping by Yemeni Houthi rebels.
Hapag-Lloyd will reroute 25 ships by the end of the year from the key waterway as freight rates and shipping stocks have increased because of the disruption, Reuters reported earlier on Friday.
About 12 per cent of the seaborne oil trade and 8 per cent of liquefied natural gas pass through Bab Al Mandeb, the strait at the southern edge of the Red Sea.
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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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