JEDDAH – Uncertainty over rising tension in the Middle East region along with the risk of a Western military action against Syria has driven oil prices to fresh high levels in recent weeks, and prices are expected to cross the $125 a barrel for Brent and $117 a barrel for WTI, if a strike actually takes place, the National Commercial Bank said in its “Saudi Economic Review” for September 2013 released Tuesday. After peaking to $118 a barrel for Brent and $112 a barrel for WTI, prices retreated slightly to $115 a barrel, and $108 a barrel, respectively. The WTI, US benchmark, was also supported on expectations of a revival in demand growth after US automobile sales gained at their fastest pace since October 2007. With the recent backing of US congress to the US president of a military intervention, the possibility of a strike on Syria is rising. “The prices are expected to cross the $125 a barrel for Brent and $117 a barrel for WTI, if a strike on Syria actually takes place. Oil prices will likely remain firm because of supply risks from other oil producers, particularly, Libya and Iran,” the report said. However, Brent at $125 a barrel would be a significant headwind for the already weak global economy, making it not sustainable for long. Judging mainly on the supply and demand fundaments, excluding the regional political risk premium, oil prices are around $90 a barrel for Brent and $85 a barrel for WTI. On the demand side, disparity between the core European countries and periphery persists, with the demand by core rising 3 percent Y/Y, while the demand by periphery posting a decline of 6 percent Y/Y in May. China's oil demand eased by 2 percent M/M from 9.94mmbd in June to 9.77mmbd in July, yet YTD demand reached 9.87mmbd, up 5.1 percent Y/Y from January- July 2012. Crude imports by China outpaced demand, gaining a sharp 20 percent Y/Y to 6.17mmbd, which is believed to have led to a build-up in stocks. Global oil demand growth is expected to accelerate in 2014 to 1.1mmbd, compared with 0.9 MMBD in 2013. The forecast of oil demand growth for 2014 has been trimmed by 0.1 MMBD on reduced GDP expecta-tions from the IMF, while that for 2013 is kept unchanged. On the supply side, OPEC crude production climbed in August as Saudi Arabia produced oil at a faster pace, along with UAE to make up for the massive shortfall from Libya. Output by OPEC increased 0.4 percent to an aver-age of 31.04mmbd from a revised 30.92mmbd in July. Saudi output increased by 0.15mmbd to 9.95mmbd in August, and expected to remain at the same level in September. The UAE increased production to 2.92mmbd, while Libya output tumbled to 0.575mmbd in August, sending production to the lowest level since October 2011. Angola reduced production to 1.74mmbd, while Nigeria's output rose to 2.02mmbd. Iran produced 2.57mmbd in August, which was down about 0.18mmbd from August 2012. OPEC's spare oil production capacity is now estimated to be only 2.2mmbd as compared to an average of 3mmbd in 2010-2012. Moreover, as the Syrian crisis continues, stock prices will be pressured despite the rise in oil prices which will trickle down to corporate results, NCB said in the report. Support will be provided by third quarter earnings next month which can limit the drain expected to continue this month. Tadawul recorded a loss of 1.9 percent during August. The market peaked at 8,214.85, a gain of 20.8 percent since the beginning of the year. However, the possible military decision on Syria pushed investors to reap capital benefits and seek safer asset classes. Only three sub-indices posted gains last month, cement, hotel & tourism, and petrochemicals at 1.5 percent, 1.4 percent, and 0.1 percent, respectively. The cement market has been backed by sound corporate earnings which have been supported by a vibrant construction sector. Stocks have dropped 1.7 percent during the first week of trading in September. The hotel & tourism sub category suffered the most by declining 5.7 percent last week, lowering its YTD gains to 83.6 percent. As the Syrian crisis continues, stock prices will be pressured despite the rise in oil prices which will trickle down to corporate results. Support will be provided by third quarter earnings next month which can limit the drain expected to continue this month. Despite the strong performance up to August 21, investor appetite was rather modest and daily trading volumes averaged at SR5.8 billion for the whole month. The positive trajectory started mid-June and ended late August, during that period daily traded volumes averaged SR5.2 billion. However, once risk levels start to escalate, investors are quick to withdraw their capital as witnessed by daily traded volumes post the index's peak which averaged at SR6.3 billion. The lack of confidence in the local market is somewhat unwarranted given the economy's strong fundamentals. Furthermore, Tadawul's majority of traders are Saudi individuals, yet Saudi institutions increased their portfolios last month by contributing 11.1 percent of buying transactions, compared to 10.9 percent in July. Foreign, other than GCC, traders' activity recorded less than 4 percent during August. — SG
