Oil prices dip amid rise in US inventories and stock market slide

Oil prices fell for a second day and were on track for a second weekly fall after US stock markets tumbled and American stockpiles rose unexpectedly.

Brent was down 0.5 per cent at $39.86 a barrel at 2:32pm UAE time, after falling nearly 2 per cent on Thursday, while US crude dropped 0.21 per cent, to $37.22 a barrel, having fallen 2 per cent in the previous session.

Both benchmarks were 6 per cent down for the week.

"Financial markets are continuing to set the tone, including on the oil market. The renewed slide on US stock markets dragged oil prices down with it," Commerzbank analyst Eugen Weinberg said.

Heavyweight tech-related stocks resumed their decline on Thursday as the number of Americans filing new claims for unemployment benefits remained high.

"Stock markets dived, oil followed, and Brent lost 15 per cent of its value in five trading sessions as money managers liquidated," oil broker PVM's Tamas Varga said.

Also dampening the market mood, the US senate killed a Republican bill that would have provided around $300 billion (Dh1.1 trillion) in new coronavirus aid.

Fears about an oversupply also added to the general feeling of uncertainty, Mr Weinberg said.

In the US, stockpiles rose last week, against expectations, as refineries slowly returned to operations after production sites were shut down due to storms in the Gulf of Mexico and the wider region.

US crude inventories rose 2 million barrels, compared with forecasts for a 1.3 million-barrel decrease in a Reuters poll.

In a further bearish sign, traders were starting to book tankers again to store crude oil and diesel, amid a stalled economic recovery as the Covid-19 pandemic continues.

Increasing stockpiles are likely to be a subject at a meeting on September 17 of the market monitoring panel of the Organisation of the Petroleum Exporting Countries (Opec) and allies including Russia.

The group known as Opec+ has been withholding supply to reduce stockpiles, but analysts say the meeting is likely to focus on compliance among members, rather than seek deeper cuts.

Following Saudi Arabia, Kuwait also lowered its official selling price to Asia for October, to counter slower demand.

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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.”