UAE stocks buoyed by oil price rally on back of OPEC+ cuts

Reuters

• Dubai’s share index rose 0.7%, Abu Dhabi’s closed 0.1% higher 
• EU embargo on most Russian oil takes effect in December
• OPEC trying to be proactive ahead of possible drop in demand

Key stock markets in the UAE closed higher on Friday, tracking the rally in oil prices following the OPEC+ announcement late on Wednesday of a two million barrel per day (bpd) cut to its production quota from November.

Dubai’s main share index DFMGI rose 0.7 percent. The Dubai bourse registered a weekly gain of over one percent, its first in three weeks.

Meanwhile, the Abu Dhabi index closed 0.1 percent higher and also posted its first weekly gain in three weeks, supported by a 1.3 percent rise in telecoms firm e&. 

However, Saudi Arabia’s benchmark index, the TASI, fell marginally, down 0.11 percent. 

• Behind the scenes at the controversial OPEC+ meeting
• OPEC+ cuts: the media’s verdict
• OPEC+ agrees deep oil production cuts, Biden calls it shortsighted

The OPEC+ production cut will represent the largest reduction since 2020 and puts the oil market on course for further tightening ahead of winter, with the EU having announced an embargo on Russian oil. 

The 27-nation bloc agreed on Wednesday to impose a price cap on Russian oil, although a specific price for the future cap has yet to be defined.

The EU will impose a ban on transporting Russian oil by sea to other countries above the price cap, which the G7 wants in place by December 5, when an EU embargo on most Russian oil takes effect.

Emerging markets equities fell on Friday, bringing an end to a five-day winning streak, with stock down 1.2 percent and currencies dropping 0.4 percent.

However, this drop may have been driven more by comments from Federal Reserve officials overnight that the US central bank is not nearly finished with its rate-hiking cycle. 

Hong Kong stocks tracked broader Asian shares lower on Friday, with Chinese property developers leading the slide on concerns over their financial health amid slowing economic growth in China.

At the close of trade, the Hang Seng index was down 272.10 points, or 1.51 percent, at 17,740.05. A sub-index of the Hang Seng tracking energy shares slipped 0.5 percent. 

“The cut was made because of the significantly more negative outlook OPEC has on demand, given the concern over China, rising interest rates/inflation and Europe’s energy crisis,” Robin Mills, CEO of Dubai consultancy Qamar Energy, told AGBI.

“OPEC is trying to be proactive ahead of a possible drop in demand and, of course, the fall in oil prices below $90/bbl created concerns, even though OPEC doesn’t explicitly talk about price. 

“However, the size of the cut is large and seems somewhat premature given the ban on European imports of Russian oil coming into effect on 5 December.”

The announcement has provided a boost to oil prices which are headed for the biggest weekly gain since early March – West Texas Intermediate (WTI) futures traded near $88 a barrel on Friday and are up around 11 percent for the week, according to Bloomberg.

Banks including Morgan Stanley and Goldman Sachs now expect Brent to advance back to $100 a barrel.

“The petro-nations announced a bigger cut to production quotas than previously expected,” said Norbert Rücker, head of economics and next generation research at Julius Baer, in a research note published on Thursday.

“The decision seems more determined by the geopolitical environment than fundamental conditions. The oil market is anything but in surplus, and spare production capacities are close to long-term averages.”

He added: “While the oil market’s rebalancing and price downtrend slows, the overall uncertainty increases. These geopolitical power games, the upcoming European oil embargo, and the hurricane season are all elements suggesting more noise and volatility in the near term.”

While the OPEC+ announcement has not been good for global market sentiment, the fact that the oil alliance had already been producing significantly below its quota means that the decline in physical supply, while still significant, will in reality be much lower. 

London-based Capital Economics has estimated the OPEC+ announcement on Wednesday will result in a cut of just over one million bpd – equivalent to about one percent – of global supply. 

Even so, it sounded a note of caution over the OPEC+ announcement. 

“It is worth pointing out though that the market backdrop is somewhat unusual for a supply cut,” Caroline Bain, chief commodities economist at Capital Economics, said in a research note published on Thursday. 

“Global oil stocks are historically low and, so far, high prices have failed to materially dent demand. Admittedly, China’s consumption has been markedly lower this year, but that could swiftly bounce back if pandemic-related lockdowns end.

“We will assess the impact of OPEC’s cut to supply on our market balance estimates, but it seems likely that it will just deepen the small deficit we forecast in the fourth quarter.”

Bain added that Capital Economics had always expected supply growth to slow later this year and into 2023, but the latest OPEC+ action had reinforced its view that prices will end the year a little higher, at $100 per barrel for Brent.