Oil ministers and high-level industry officials will gather in Abu Dhabi on Thursday to assess a finely poised market.
Benchmark North Sea Brent crude futures have risen by more than 30 per cent since mid-November to hit an 18-month high last week of US$58.37 per barrel. Jittery traders, however, sent prices down by more than 3.5 per cent on Monday as a recent rally ran out of steam, leaving Brent at about $55.17 per barrel late on Tuesday.
The gathering will be attended by Khalid Al Falih, Saudi Arabia's energy minister, as well as Suhail Al Mazrouei, his UAE counterpart, and Mohammad Barkindo, the secretary general of Opec.
Mr Al Falih and other officials from Opec member states have been careful to make only reassuring comments since their deal at the end of November to restrain production – but they are under increasing pressure to make clear how that deal, as well as a complementary one by some non-Opec producers, will be policed to ensure credibility.
The first meeting of a committee to monitor the deal is due on January 22 at Opec’s Vienna headquarters, which will be jointly chaired by oil ministers from Kuwait and Russia.
The event, which is being run by The Atlantic Council, a US think tank, will also feature some senior executives from Abu Dhabi’s oil establishment, including Sultan Al Jaber, the head of state oil company Abu Dhabi National Oil Company (Adnoc).
The key players’ comments will be closely monitored for clues as to how they intend to maintain credibility long enough for the global oil market to soak up a glut that has lasted for more than two years.
While Saudi Arabia and its closest Arabian Gulf allies – the UAE, Kuwait and Qatar – have all made clear moves to reduce exports, it is not clear how or if some other parties will comply.
“There will be some countries that will cheat, Iraq being the most likely culprit,” said Amrita Sen, the chief oil market analyst at Energy Aspects. Iraq had initially argued for an exemption because of its special circumstances, as Libya and Nigeria were exempted because of lost output because of conflict, and Iran because it is still recovering from sanctions.
But Iraq had been producing at record levels in the months before the deal and so agreed to come back into the quota system for the first time in decades.
On Tuesday, however, its State Oil Marketing Company (Somo) told customers it plans to export more than 3.6 million barrels per day (bpd) next month, up from a record 3.5 million bpd last month. That would seem to contradict statements by the ministry on Tuesday saying it had already cut output by 160,000 bpd on the way to meeting its obligation under the Opec deal to cut 210,000 bpd in the first half of this year.
Iraq’s oil minister, Jabbar Al Luaibi, had been scheduled to attend the Abu Dhabi conference but will not be coming.
Similarly, while Russia has agreed to cut 300,000 bpd, its deputy energy minister subsequently laid out plans to boost exports this year on top of last year’s 5 per cent increase.
Apart from the credibility of the output deals there is also the big question of demand this year, predictions about which are made more difficult than usual because of a new government in the US, shifting policies in China and other factors.
“As the tussle between the short-term overhang and medium-term supply crunch intensifies in 2017, the uncertainties around demand could get worse,” Ms Sen said. So “lying ahead is another year of volatility in prices”.
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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.”
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