Oil prices dropped on Monday after oil producers’ alliance Opec agreed to another large output hike in September.
Brent, the benchmark for two thirds of the world's oil, fell 2.2 per cent to $68.12 a barrel by 5.09pm UAE time on Monday, and West Texas Intermediate, the gauge that tracks US crude, declined 2.5 per cent to $65.6 a barrel.
The Organisation of the Petroleum Exporting Countries and their allies, known as Opec, agreed on Sunday to raise oil production by 547,000 barrels per day for September, the latest in a series of accelerated output hikes to regain market share.
The move marks a full and early reversal of Opec's largest tranche of output cuts, amounting to about 2.5 million bpd, or about 2.4 per cent of world demand.
“The meeting lasted just 14 minutes, suggesting there was no pushback and broad support for the decision,” said Giovanni Staunovo, a strategist at the Swiss bank UBS.
“With Sunday's decision, the group fully unwound one layer of the 2.2 million barrels per day [mbpd] of voluntary crude production cuts. The production quota increase between March and September is closer to 2.5mbpd, as it includes a capacity-related quota adjustment for the UAE of 0.3mbpd.”
So far, the oil market has been able to absorb the additional barrels coming from Opec very well, with Brent crude moving mostly sideways in a $60 to $70 per barrel range in recent months, Mr Staunovo explained.
With some countries in the group producing above the quota, as well as those that previously overproduced facing compensation cuts and some members probably maxed out in terms of capacity, the actual production increases are likely to be lower this and next month as well, he added.
“All eyes now shift to US President Donald Trump's decision on Russia later this week and whether he targets buyers of Russian oil with secondary sanctions or tariffs,” Mr Staunovo said.
Recent geopolitical tensions have added to oil market volatility this year. A 12-day conflict between Israel and Iran earlier this year drove oil prices up by more than 13 per cent before they retreated below prewar levels.
Vijay Valecha, chief investment officer of Dubai-based Century Financial, said the escalating geopolitical tensions surrounding Russian oil could significantly tighten global supply.
US President Donald Trump's aggressive stance, threatening 100 per cent secondary sanctions on Russian crude buyers, risks removing up to 2.75 million bpd from the seaborne market, potentially forcing major importers like India and China to seek alternative, more expensive sources, he added.
“This prospect of substantial supply disruption, combined with renewed expectations of Federal Reserve rate cuts following weaker US jobs data, could stimulate demand as a weaker dollar makes oil more affordable,” according to Mr Valecha.
“Should these sanctions materialise and global growth avoid a significant downturn, the tightening supply-demand balance would create a powerful tailwind for oil prices.”
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.”
