Sunday, December 7, 2008

Oil price continues to plummet - Omani crude $36. Central Bank injects $700 mln of liquidity into Omani banks

As the world recession hits, oil demand falls, speculative cash goes bear, and OPEC fails to act decisively to cut production, the usual is happening - a crash in oil prices, now at their lowest since 2004. And it seems to keep getting worse; see a great (but depressing) article in The Market Oracle.

As I have said all along, Oman was fine as long as oil stayed above $60. But that ain't happening. As it goes now, next month could see $25/bbl or less, albeit only temporarily. Oman already cut their 2009 budget assumption to $45. So, expect some serious belt tightening from HE Mr Macki in 2009, at least on the Government Fiscal spending front, if oil stays this low or lower for the next 60 days. Government budgets are being reduced as we speak, but there will be a big battle within the Cabinet to claw back Ministry budget already approved. The big money made over the past few years has been channeled into repaying debt and recapitalising the Sovereign wealth fund, along with allowing a huge increase in Government spending - some of it good infrastructure stuff, some of it pretty optional if real spending is to now be slashed - did we really need an Opera House, for example?

Meanwhile, Hamood Sangour Al Zadjali announced that the Oman Central Bank has relaxed the reserve requirements for Oman's banking system, now allowing them to count cash on hand and short-term certificates of deposit held with the central bank towards their 8% reserve, thereby allowing a significant boost in their ability to lend into the domestic market by making $700 million extra available. The bank had previously reigned in the banks earlier this year as credit soared by over 50% and inflation hit over 15%. This will help ensure project financing can be kept up for the Galfars and Renaissance type companies. Oman has already posted a (rather small) promise of a fund with 150 mln rials to underpin shares in the stock market, which perhaps fortuitously seems to have been announced when the world markets paused on their downward trend.

Oman always has a problem during lower oil price times: how to maintain adequate Government cash flow from the oil and gas sector vs taking counter-cyclical opportunities to make sound longer term investments as costs drop? Steel and cement, for example, are now expected to be a lot cheaper next year as world demand drops and before inflation appears.

How much can and should the Government borrow in 2009? It seems strange that the Government seems to allow off-balance sheet project borrowing for the Sohar projects, but keeps funding their domestic oil and gas investments from day to day production cash flows. One way out for Mr Macki would be to ring-fence, at least in part, the Government's shareholdings in the upstream oil and gas business, and allow some of the significant long-term production investments currently underway and planned (such as the massive multi-billion dollar Harweel project, which won't start to flow any extra crude until at the earliest 2010) to be financed by borrowing.

HE Rumhy, Minister of Oil and Gas, has done well recently to leverage high oil prices and get big spending commitments from new entrant IOCs - they spend their money now, take most of the risk, and are rewarded by higher returns later (the Government is essentially borrowing this investment against future payments from their oil and gas production). The deal he did with BP was excellent in that regard, getting British Petroleum to commit $600 mln without a commercial deal for production. But with a few others subsequent the Ministry was too slow, and so recent deals are not as good, nor are they getting anything like the number of bids they did just 12 months ago.

Time for a garage sale?
The Government will also need to look at asset sales, even in the current climate, there may be deals to be done. The State's shares in Omantel, for a start, are a long term strategic liability due to technology risk. The electricity and water infrastructure too should be substantially sold off - control can be mmaintained by smart regulation. And the older hotels the Government still owns, such as the Intercon and Crown Plaza, that are soon in need a major overhaul. The land they occupy could just be leased long term if selling that is politically impossible.

Crude prices collapse 25% in the last week
By Dalton Garis, Special to Gulf News
Published: December 06, 2008, 23:53

Abu Dhabi: The New York Mercantile Exchanges benchmark West Texas Intermediate light sweet crude contract finished last week at $40.81 per barrel, a 25 per cent decline from the previous week's $54.43. Now, no back month price is above $81 per barrel, even for delivery in December 2015.

Brent, against which 60 per cent of the world's crude is priced, closed the week at $39.74, down from the previous week's $54.41. The local Dubai Mercantile Exchange's Oman heavy sour nearby future closed the week at $36.60, a 28 per cent fall from the previous week's $50.88.

Adding to the gloom, the basket of the Organisation of Petroleum Exporting Countries (Opec) hit $40.75, further pressuring Middle East and North African (Mena) economies that rely heavily on crude exports.

Last week's broad-based market sentiment that a local bottom at $50 per barrel had been reached failed to support prices after the worst jobs report in 34 years in the US was released on Friday.
The crude market supply price insensitivity is exacerbated by Opec's seeming inability to discipline its members to cut production. Possibly, that was the reason last week's quasi-meeting announced no new cuts. It needed to assure enforcement of its last announced production cuts before imposing new cuts. So any cut announcements were pushed back to mid-Dec-ember.


Oman to pump 270m riyals into banking system
Published: December 04, 2008, 23:35

Dubai: The Central Bank of Oman on Thursady said it had amended bank reserve requirement rules to release 270 million riyals (Dh2.57 billion) into the banking system to help lenders cope with the financial crisis.
...The Omani central bank, tackling record inflation rates above 13 per cent this year, had raised reserve requirements in August to eight per cent from five per cent in an effort to curtail credit growth. ...Oman has since "effectively" reduced the reserve requirement back to five per cent to prevent any indirect effects on liquidity from the global credit squeeze, Central Bank Executive President Hamood Sangour Al Zadjali said.

"The central bank decided to effectively reduce the reserve requirement, which as a result injected about 270 million riyals back into the banking system," Zadjali said.

Under new rules, banks are allowed to hold up to three per cent of deposits "in the form of currency held in banks vaults and or investments in certificates of deposit issued by the central bank", he said. The eight per cent official reserve requirement remained intact, he said.

"Since all banks would have cash on hand and almost all banks have interest-bearing central bank CDs as part of their portfolio, it is considered an effective reduction in the reserve ratio," Al Zadjali said. The central bank chief said there was "no evidence of any major liquidity problem" in Oman, where credit growth hit 52.7 per cent in October.

Still, the central bank allocated about $2 billion to local banks to provide them with dollar liquidity, while the government set up a 150 million riyal market-maker fund with the private sector to help stabilise the country's bourse.

Interbank rates have moderated to less than one per cent from 2.6 per cent in the first week of October, Al Zadjali said.

"The year 2008 as a whole... could end up with very high growth in credit, even if one presumes some moderation in November and December," he said.

Inflation - which has almost doubled in the last year - could "moderate significantly" in 2009 as price pressures decline in developed countries, food and non-oil commodity prices ease and the US dollar appreciates, he added.

"These favourable effects could be imported to Oman, and thereby create sobering influence on the inflation," Al Zadjali said. "Because of the fall in oil prices, despite fiscal stabilisation, there could be some moderation in domestic demand, which may ease pressure on supply constraints, helping thereby to improve the inflation situation."


  1. NO HE for Hamoud Sangour?

  2. Shocking, just shocking.


  3. Can I just say this: what an awful design on that Market Oracle website!

  4. any thoughts on the tourism projects – Ferries, Caving Projects, unused hotel in Masirah, new Cities, ...............

  5. As per ONA, the price of oman crude (per barrel) is $51.47 Jan Delivery.

  6. UD - what is the impact of these relaxed reserve requirements on Bank lending - particularly for mortgage finance for ITC projects? To my knowledge Local and Branch banks have reduced the LTV to 60% on all lending - especially ITC projects. Do you see this being moderated with this development? Otherwise the ability for Oman to continue to attract foreign investment for residential dwellings, that is the kickstart/backbone for many of these ambitious projects, will be severely curtailed.
    The negative sentiment that will spill over from the current Dubai property crash will also not help. As Oman has such a small volume (currently circa 2000 odd) of potentially foreign owned properties, isn't it important for Govt/CBO/Omran to look at some sort of Real Estate Bank, tied to realistic/independent/insurable property valuations, that this bank can rely on and therefore confidently mortgage against. This is what Abu Dhabi have done to support local developers that a all or part govt. owned or affiliated to protect against this current liquidity crisis.

  7. I've spoken to officials from three of the Omani banks. It is simply not true that the CBO has injected a single baisa of liquidity into the market. All banks have uniformly rejected the CBO's offer to lend them money because the terms are too harsh. CBO is playing around with numbers to make it look like it has injected money into the system when all they did was change some calculations and delayed the higher reserve requirements which it had earlier dictated. All this helped banks in the short term but is nothing like what other GCC countries have done where their central banks had literally injected/deposited funds into banks to prop up liquidity.

    It appears Oman's central bank is happy to see lending restricted in Oman due to this liquidity restraint.

  8. Welcome back from Eid Muscati.

    Nice info. I can't blame them wanting to cool things down a bit.

    What about real estate project financing? What's the domestic and UAE exposure?

    Will bank Muscat still give me a mortgage to buy a house at the Wave?


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