The agreement reached by Opec and non-Opec countries to reduce the production is likely to bring oil price recovery to close to $ 60 per barrel in the course of the first few months of 2017 even at a compliance level of 80 percent according to a strategy note issued by Arqaam Capital, the emerging and frontier investment bank. Historically Opec production cuts had over $5/bbl impact on oil prices, according to the note.
"Large inventories remain but higher oil demand and lower supply should help bring the oil market back into equilibrium, despite higher US shale oil and Trump's plans to make the US independent from Opec. We see $60 per barrel as the medium term price for oil as a higher price will re-attract the high cost producers that are now more efficient than they used to be and can operate at lower prices. As a case in point, the US rig count already started to increase when oil hit $50 per barrel,' Arqaam said in the note.
Arqaam estimates that with oil price of $60 per barrel, the UAE, Kuwait, and Qatar would not need to make any further net fiscal adjustments, while Saudi Arabia would only have to cut spending and raise revenues by 3 per cent of GDP to come mostly from energy price, subsidy and VAT reforms. Bahrain and Oman, on the other hand, would have another 5-6 percent left. This would suggest that the bulk of the austerity has already come through, easing the pressure on GCC economies," said Jaap Meijer, Managing Director and Head of Equity Research at Arqaam Capital.
"Higher US interest rates of around 75bps should not affect the GCC too much on low corporate (bar some GREs) and government leverage, below average foreign ownership as compared to Emerging Markets, substantially reduced funding needs and improved funding mix with more international bond issues and Mena stock markets have performed well post the December rate hike," he added
Arqaam maintains a selective Overweight position in Mena banks as it expects the NIM compression to have come to an end, while bad debt charges are unlikely to worsen much in 2017. Arqaam also increases its Overweight in Lebanon on a significant wealth transfer from the Banque du Liban to the private banks. Moreover, Arqaam is reducing its Underweight position in Qatari banks tactically ahead of the second phase of FTSE's upgrade of the country to Emerging Markets status, as well as reduced concerns over the macro imbalances in the Qatari economy.
Arqaam is more optimistic about the prospects of the KSA banks. "We continue to play banks with the lowest funding costs and strong operating earnings capacity. Egyptian banks are extremely well positioned to benefit from the FX devaluation", Jaap said,
