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Opec deal or not, Saudi Arabia has loosened oil's grip on stocks
[CAIRO] Investors in Saudi Arabia's stock market can breathe easier going into Wednesday's Opec verdict on production.
The kingdom's benchmark equity gauge and the price of oil, the nation's main source of income, are negatively correlated for the first time since January. The Tadawul All Share Index advanced 26 per cent since Saudi Arabia's record-breaking bond sale last month, the most in the world during that period. Oil dropped about seven per cent.
The decoupling comes at a crucial time for the kingdom. Doubts are growing that members of the Organization of Petroleum Exporting Countries will agree to cut oil output when they meet this week.
Brent crude dropped the most in more than two months on Friday after planned talks between producers inside and outside the group were cancelled, before paring some losses on Monday after Iraq's oil minister said he's optimistic for a deal.
Stocks' falling dependence on crude prices is a vindication for Deputy Crown Prince Mohammed Bin Salman, who has led a campaign to cut spending, increase non-oil revenues and help attract institutional investors to the US$426 billion exchange.
The turning point came on Oct 19, when Saudi Arabia raised US$17.5 billion in its debut international bond offering and vowed to speed up payments to contractors, boosting confidence in the government's commitment to overhaul one of the world's 20 biggest economies.
Saudi stocks responded with the longest winning streak in more than two years, while interbank lending rates fell as a shortage of cash in the financial system started to ease.
"The bond sale has certainly addressed some of the short-term liquidity concerns," said Salah Shamma, a money manager at Franklin Templeton in Dubai who helps oversee an US$86 million Middle East and North Africa fund, of which Saudi shares make up more than a quarter.
Still, the government has work to do to pay off all contractors and fully alleviate the cash squeeze in banks, he said.