MENA MARKETS REVIEW: JUNE 2020

KUWAIT: JULY 12, 2020

HIGHLIGHTS

• International markets continued to build on the rally which started in Mid-March driven mostly by optimism caused by economic reopening plans.
• The MSCI AC World Index added 3.03% in June narrowing its year-to-date losses for the first half of the year to -7.14%. The S&P 500 and DJIA in the US advanced by 1.84% and 1.69%, while the NASDAQ continued to set new record levels with a gain of 6.0% and 12.1% as of mid-year.
• The rally in the oil market slowed down in the second week of June and prices were range-bound around US$40/bbl level for Brent. Nevertheless, for the whole month, Brent managed to add 16.5% bringing its total advance for the second quarter to 91.8%.
• In the GCC, the picture was generally positive with all markets closing in the green with the exception of Oman. The S&P GCC Composite Index advanced by 0.94% and was weighed down by the weak performance of the Saudi market. The best performing for the month were markets in the UAE with Dubai up 6.2% and Abu Dhabi 3.48%. Kuwait’s All Share index added 2.70% with the Premier Market Index outperforming with a gain of 3.4%. The Saudi Tadawul All Share index advanced marginally by 0.15% after shedding most of the month’s gains during the last week of June.

OIL RALLY COOLS ON RESURGENT COVID-19

May’s oil rally continued into June, with prices topping three-month highs on increased optimism about the economic outlook and confidence that the oil market was tightening thanks to OPEC+ supply curtailments. Brent reached a high of $43 before closing the month up 16% at $41.0/bbl. However, anxieties about the pace of the oil demand recovery have resurfaced of late as Covid-19 infections surge in post-lockdown US states. Adding to this, there are concerns that global oil demand will never recover to pre-pandemic levels of 100 mb/d in the context of the clean energy transition. Nevertheless, the International Energy Agency (IEA) is still sticking by its forecast of pre-pandemic levels being reached in 2022: in its June oil market report, the agency expects oil demand to contract by 8.1 mb/d this year – one of the most severe contractions on record – before rising by 5.7 mb/d in 2021 to 97.4 mb/d.

On the supply side, OPEC+ in May (the first month of cuts) notched up a reduction of 8.44 mb/d versus the group’s target of 9.7 mb/d, which represents a compliance rate of 87%. The oil producers’ group agreed to extend the two-month duration of these maximum cuts for a further month to end-July, after pressuring serial non-complier Iraq, which only achieved 46% of its target cut, to compensate the group with deeper cuts over the next few months. Supply-side tightness was also helped by further declines in US shale production. Output as of 26 June was estimated at 11 mb/d, down an incredible 2.1 mb/d (16%) from its late February peak. This has coincided with US oil rig counts plummeting to an 11-year low of 185.

Overall, following June’s supply-side curtailments, the narrative has now switched back to oil demand. For oil to break through the lower $40s resistance level, demand will need to recover more quickly. And for that to happen, the global corona pandemic will need to be brought fully under control.