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|25 November, 2018

Sunday outlook: Major sell-off in oil markets drags down stocks

West Texas Intermediate falls by 7.7 percent per barrel and Brent Crude by 6.1 percent. Energy stocks drag down markets in US and UK, More commentary on Middle Eastern markets, currencies and precious metals

Storage tanks of kerosene are seen at the Middle East Oil Refinery Company (MIDOR) in Alexandria, Egypt, November 7, 2018. Image for illustrative purposes.

Storage tanks of kerosene are seen at the Middle East Oil Refinery Company (MIDOR) in Alexandria, Egypt, November 7, 2018. Image for illustrative purposes.

REUTERS/Amr Abdallah Dalsh
  • Oil prices plunge 7.7 percent despite talk of cuts
  • US, European markets dragged down by energy shares
  • Bank shares boost Saudi in thin trading for Mideast markets
  • Dollar rallies, gold retreats

Oil prices

The recent rout in oil prices continued on Friday due to ongoing concerns that a trade war between China and the United States will dampen demand at a time when supply is continuing to rise, especially in the U.S., leading to talk of a potential production cut being on the table when members of the Organization of Petroleum Exporting Companies meet on December 6.

Prices of West Texas Intermediate December futures dropped by 7.7 percent to finish at $50.42 per barrel in trading on Friday, while Brent Crude futures fell by 6.1 percent to finish at $58.80 per barrel. It was the seventh consecutive week of price declines since early October, when prices stood at $85 per barrel. 

In a note sent to media on Friday, Lukman Otunuga a research analyst at forex trading firm FXTM said that rising supply and signs of slowing demand had "written a recipe for disaster" for oil markets.

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"With an appreciating dollar rubbing salt into the wound, the outlook for oil prices points to further downside," he said. "Although OPEC is expected to cut oil production at its meeting in early December, oil bears are clearly unfazed and this continues to be reflected in price action. Focusing on the technical perspective, WTI oil has scope to depreciate towards $50 a barrel in the near term."

Fiona Cincotta, a senior market analyst at City Index, argued that US President Donald Trump's intervention in markets via a series of tweets pushing for lower prices has also impacted markets, stating that "while this is the case it will be difficult to see a return to oil at a higher level" unless OPEC members decide to cut production.

Global markets

On Friday, the S&P 500 Index and the Dow Jones Industrial Average finished 0.7 percent lower, dragged down by the poor performance of energy stocks as a result of the oil price slump in a shortened trading session following the Thanksgiving holiday. U.S. energy stocks dropped by 3 percent, according to Reuters.

In Europe on Friday, the pan-European STOXX 600 closed 0.4 percent higher but finished down overall for the second week in a row. Concerns about the continent's growth prospects have meant that many analysts have scaled back expectations of an interest rate hike by the European Central Bank.

Britta Weidenbach, Europe portfolio manager at German asset manager DWS, told Reuters on Friday that investors also had concerns regarding a number of political issues.

“The U.S.-China trade conflict, Brexit negotiations, Italy to some extent, all of this is causing worries that companies will further delay their investment decisions,” she said.

There was some respite for Italian banks on Friday as bond yields eased slightly, leading to an index of Italian banking shares increasing by 1.3 percent. Concerns remain about the fate of Italy's economy and the ongoing dispute between the new coalition government and the European Union over the country's planned expansionary budget and the sustainability of its debts. According to Reuters, European Central Bank supervisor Daniele Nouy told an Italian newspaper on Saturday that the rise in Italian bond yields, which have recently increased to 300 basis points over German yields, could prove damaging to Italian banks, which are significant holders of the country’s sovereign debt.

The FTSE 100 index finished 0.1 percent lower on Friday, with the declines led by precious metals firm Fresnillo, which is based in Mexico and which may face a tougher regulatory regime in its home market, a note by JP Morgan said last week.

On the broader FTSE All Share Index, oil-related stocks were also among the biggest fallers as Premier Oil dropped 11 percent and Cairn Energy dropped 7 percent. Newspaper group Reach also declined by 7.2 percent. On Friday, an administrators' report into rival newspaper group Johnston Press revealed that a "pre-pack" administration deal aimed at saving the group agreed earlier this month had slashed the book value of many of Jonhston's key titles, with Scotland's national newspaper group, The Scotsman, valued at just £4.3 million. Johnston Press paid £160 million for the same titles in 2005.

Most Asian markets finished in the red on Friday, with the Hang Seng Index dropping by 0.4 percent and the Shanghai Composite Index dropping 2.5 percent, with markets remaining cautious ahead of this week's G20 meeting in Argentina.

Middle East markets

Stock markets in the Middle East were fairly quiet on Thursday, but Saudi Arabia's stock market gained 1.2 percent as shares in a couple of the kingdom's biggest banks increased in value. The country's biggest lender, National Commercial Bank, saw its shares climb in value by 2.5 percent and Al Rajhi Bank's shares increased 2.3 percent.

Shares in Anaam International Holding traded heavily until it hit a 10 percent upper limit at 1.26 Saudi riyals ($0.34) per share after the firm announced that it had signed an agreement to buy commercial and real estate assets in a number of cities from Abdullah Abbar & Sons Cold Stores, and from Dar Al Abbar.

Bank shares also contributed to a 0.28 percent gain for the Abu Dhabi Securities Exchange on Thursday, with Abu Dhabi commercial Bank climbing by 2 percent to 8.23 dirhams ($2.24) per share, and market heavyweight First Abu Dhabi Bank gaining 1 percent to 14.48 dirhams. The Dubai Financial Market finished flat, with Shuaa Capital among the gainers after its shares finished 2.9 percent higher following its announcement that it had acquired a 4.8 percent stake in Ajman bank in a 100 million dirham deal.

The Bahrain Bourse finished 0.7 percent higher, led mainly by financial stocks, while in Qatar the market eventually closed 0.4 percent higher, but only after trading had been  suspended and a number of earlier trades cancelled after what the exchange described on its website as a "technical failure". Shares in telecoms firm Ooredoo and Qatar Oman Investment Company were among the top gainers - up 2.7 percent and 2.2 percent respectively. Qatar General Insurance witnessed the biggest decline in value - down 4.2 percent to 44.05 riyals. The company announced on Thursday that one of its subsidiaries (in which it holds a 60 percent stake) had opened a factory to produce a drinking water brand known as Al Rawda.

Markets in Kuwait and Oman were closed for public holidays.

Currencies

The U.S. dollar, which is negatively correlated with oil prices, witnessed its largest weekly gain in a month as investors turned to the greenback as a safe haven, with the dollar index against a basket of six major currencies increasing by 0.3 percent to 96.569 on Friday afternoon.

The euro fell by 0.7 percent to $1.1329 due to concerns about the prospects for Italy's economy and uncertainty over Brexit, although a deal struck late on Saturday with Spain offering it a say in Gibraltar's future appeared to have paved the way for agreement between Britain's government and the European Union over the terms of its withdrawal, which are set to be agreed between both sides at a summit on Sunday, according to Reuters. The UK government still needs to gain approval for the deal from its own parliament for the deal, however.

The UK pound had fallen by 0.5 percent on Friday to $1.2802 due to concerns over whether a deal could be struck which could satisfy both EU members and its own parliament.

Precious metals

The rising dollar weighed on the price of gold, with the yellow metal trading down 0.4 percent in spot markets on Friday at $1,222.44 per ounce.

One-month gold futures contracts were trading 0.08 percent lower at $1224.80 at close on Friday.

(Writing by Michael Fahy; Editing by Shane McGinley)


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© ZAWYA 2018