$30 Brent is finally here!

Oil market facing all kinds of shock, says Matein Khalid.

I had called for Brent crude to fall to $30 in successive columns since the November 2014 Opec conclave in Vienna, when Saudi Arabia abandoned its traditional role as the "swing producer" the central bank of black gold. The world oil markets now face a supply shock, a demand shock, epic volatility and the loss of the swing producer. The world is running out of storage capacity, in Rotterdam, Antwerp, Galveston Texas and Kharg Island in Aberdeen. In 1999, this led to $10 Brent. The petro-currencies I track now price this macro scenario. Note the Canadian dollar has now fallen to 1.45 and some of my closest friends in Dubai/Abu Dhabi are in the market for an office tower in Toronto or Montreal. Brent and West Texas both traded at $29 on Friday. A century ago, John D. Rockefeller called the free-fall in oil prices "the great sweating".
The free-fall in crude oil is catastrophic for the world's oil-producing provinces, from West Texas and North Dakota in the US to Russia, West Africa, Colombia and the Arabian Gulf states. GCC economies have suffered a $500 billion deflation shock at a time when unrest afflicts parts of the wider Arab world. Since GCC currencies are pegged to the US dollar, a deflation shock guts their domestic stock and property prices at the precise moment when the Yellen Fed has raised US dollar rates. It is no coincidence that Emaar peaked at Dh12 just after the euro peaked at 1.40 in spring 2014. Now that euro is 1.08 and Emaar is Dh4.5, making a 50 per cent implied volatility put sale irresistible even though Emaar options do not trade in the Chicago Board Options Exchange.
The GCC faces a tough policy/macro milieu in 2016. As government slash spending (the Saudi Arabian budget deficit is 20 per cent of GDP this year), economic growth rate and corporate profits will fall. Fiscal austerity and a liquidity squeeze in the regional banking system mean protracted bear markets in GCC equities and property. The dollar currency pegs mean a monetary ease to offset the deflation shock is impossible. In a liquidity crisis, you sell what you can, not what you must. This is the reason a liquid megacap like Emaar has been slammed to Dh4.5 even though it has slashed its debt, listed Emaar Malls, doubled operating margins to 60 per cent and presold its 2017 delivery schedules. The twilight zone of markets is the value zone of Mattinomics.
The Federal Reserve prices 100 basis points in rate hikes in 2016. This means three month Eibor, which rose from 0.60 to 1.05 basis points in 2015, could well rise to 2.5 per cent. This is the reason property finance and bank funding costs will surge. The US data momentum is accelerating with 290,000 new jobs in December. So the King Dollar trend continues and Brent crude could well fall to $20 this spring, the Goldman Sachs target.
World trade has collapsed. The Baltic Dry Freight index was 4,000 in 2010 and 1000 in early 2015. It is now 378. Credit risk has surged for risky borrowers, oil drillers in Texas to sovereign borrowers in Africa, Southeast Asia and the Gulf. StanChart cut lending lines to 8,000 small businesses alone in the UAE in 2015. The world's biggest shipping empires face failure despite lower energy costs. The $3.8 trillion emerging market corporate debt is a systemic threat in international banking.
The business cycle in the Gulf faces its biggest downturn since 2008. GCC equities have underperformed the Morgan Stanley emerging market index by almost 50 per cent since 2011 and money supply growth has now turned negative in the UAE, the most diversified, networked, globalised economy in the Gulf.
I am alarmed by the grim new realities of European banking, 70 per cent of foreign bank lines to the GCC. I am alarmed by the new credit risk paradigm in energy that will mean spread widening in the Mena debt/sukuk market. I am alarmed by the scale of economic adjustment that is needed to stimulate growth and the feebleness of the reform agenda. As in 1997-98 and 2008-09, King Dollar means financial distress and secular bear markets in the emerging markets. Yet it is always darkest before dawn. So I go value-hunting in GCC equities.