Volatility hit stock markets in the Gulf region as they opened for trade on Sunday, bracing for a white-knuckle ride in the short term as investors assess the risk of a protracted regime change conflict between Iran and Israel allied to the US.
Tadawul exchange in Saudi Arabia, the biggest Arab bourse, clawed back some of the earlier losses after slumping as much as 4.6 per cent at the open. It was trading 2.09 per cent lower at 1.14pm UAE time.
Arabian Drilling dropped the most in Riyadh trading, slumping more than 7 per cent, while budget carrier Flynas was down 6.4 per cent. Saudi Aramco, the world's biggest oil exporting company, however, gained 2.64 per cent.
The benchmark index of Muscat Exchange, which retreated as much as 3 per cent earlier, was trading 1.94 per cent lower.
The main stocks gauge in Bahrain fell 0.9 per cent.
Most Gulf markets, however, remained closed on Sunday, with the Kuwaiti regulator suspending trade without explanation.
"Based on the board of commissioners of the CMA, Bourse Kuwait announces the suspension of trading effective 1/3/2006, and until further notice,” the Kuwaiti stock market said in a notice on its website.
Qatar Exchange in Doha, which hosts the biggest US military base in the region, was closed for trading on Sunday for a bank holiday.
Equity markets in the UAE, which has faced several waves of drone and missile attacks, are closed for the weekend and are scheduled to resume trading on Monday.
"Iran’s continuing missile and drone strikes on GCC countries have pushed markets into uncharted territory,” Iridium Advisors said in a note on Sunday.
"The closure of the Strait of Hormuz and regional airspace disruptions are raising immediate questions around logistics, supply chains, and business continuity.”
Tehran has targeted US bases in the region, as well as targets in the UAE and other Arab nations, after the US and Israel launched co-ordinated strikes against Iran on Saturday.
The Gulf markets have resumed trading just a day after the region plunged into one of its biggest geopolitical turmoil and traders have little time to digest the events that are still unfolding at a rapid pace.
Khaled El Khatib, chief market analyst at easyMarkets, said the UAE and Saudi Arabia's exposure to international markets make them the most susceptible to a fast and volatile market reaction.
Dubai has emerged in recent years as a global financial hub, while an economic boom in Saudi Arabia means Riyadh is becoming a destination for capital.
“The foreign participation in the Saudi market, and the 'safe haven' title for the UAE market will make them more exposed to the short-term volatility,” he said.
Meanwhile, Ahmed Azzam, head of market research at Equiti Group, said that Adnoc's announcement on resumption of operations without interruption “tells you what nervous investors are watching”.
“The oil backstop matters, but it's not a magic shield,” he said.
All eyes on the Strait
Much attention has since turned towards the Strait of Hormuz, through which roughly one-fifth of global oil passes each day.
Iran, which sits on the northern shore of the strait, wields significant control over it and can determine how much of the world's oil exports pass.
On Saturday, ships were instructed to avoid passing through the strait by the Iranian Navy, according to industry operators. Bloomberg said the strait has effectively been blocked by missiles flying across the region.
Even a 20 per cent to 30 per cent dip in Gulf exports due to transit disruptions could lead to a “severe” spikes in oil prices, Arth Malani, chief executive at Northstar Insights, said.
“The defining variable is the Strait of Hormuz. Unlike the Red Sea, Hormuz has no alternative route, making any closure far more consequential than Houthi Red Sea disruptions,” he said.
Brent crude prices closed at $72.48 a barrel on Friday, while West Texas intermediate crude settled at $67.02 a barrel.
In the worst-case scenario of a protracted blockade of the strait, analysts push crude prices to $100 a barrel or more.
Mr Malani said oil prices were anticipated to spike towards $80 a barrel in a sharp reaction to the conflict in the short term.
"We expect the benchmark crude grades to jump anywhere between 10 per cent to 15 per cent on Monday opening since financial markets will be quick to price in the geopolitical risk premia,” Vijay Valecha, chief investment officer at Century Financial said.
"How long the price impact will last depends on how long it takes for the war to conclude.”
Days, weeks or months?
The biggest question facing Gulf stocks – as well as the region itself – is how long the conflict will last. US president Donald Trump maintained some flexibility on Saturday, telling Axios he could either “go long and take over the whole thing, or end it in two or three days”.
He also told the outlet he has several off-ramps, although none were outlined.
One belief is that, unlike the capture of Venezuelan leader Nicolas Maduro earlier this year or the assassination of Quds Force commander Qassem Suleimani, the latest military campaign by Mr Trump could last weeks or even months.
The impact on Gulf economies will be varied, while there could be a "fiscal boost due to strong crude prices for Saudi Arabia, Qatar in particular and for all of the Gulf, there is likely to be an impact on trade and tourism”, Mr Valecha said.
Already Dubai Airports suspended all flight operations until further notice while global airlines suspended their flights across the region.
“You may get brief windows of opportunity during ceasefires or when things are a bit quiet, but … this is very, very disruptive,” said Stephen Fallon, founder of DBM Consulting.
“The UAE relies on the ability and the frictionless movement of people and goods. This is really bad for states like the UAE, because this is sort of the necessary oxygen to their economic model,” he said.
Iranian leadership ceding to Mr Trump's calls for an unconditional surrender, or a potential coup and restart in negotiations between the two countries could deliver a rapid end to the conflict. Mr Fallon said such scenarios are “unlikely”, adding that the conflict could last for months.
Should it drag on, Mr Azzam said the story would shift from headline volatility to financing an operating costs.
This would lead to higher war-risk insurance and higher shipping costs, while tighter funding conditions could spill into earnings, credit quality and investment decisions.
“The longer uncertainty persists, the greater the risk of FDI hesitation, slower non-oil activity, and higher hedging costs … because businesses start planning around disruption rather than treating it as a one-off shock,” he said.
