The US recovery, China’s slowdown and Rouhani’s elections as Iran’s President constitute downside risks, however. Non-oil growth continues to strengthen in UAE, Saudi Arabia and Qatar, supported by robust domestic demand and improved banking sector liquidity.
Generally GCC credit should remain well supported, in our view. Given strong balance sheets and local investors’ ownership support, we do not think that the region will be at the forefront of investors’ concerns about the effects of less ample global liquidity. Hence, we think that the market correction has provided an opportunity to take a more positive view on the GCC credit space. We upgrade Qatar sovereign to overweight in our Global EM sovereign credit portfolio, with a preference for the long end of the curve. For investors looking to increase exposure in Abu Dhabi, we highlight that quasi-sovereigns screen as cheap versus the sovereign based on historical and cross-regional comparisons. In the GCC senior bank bond/sukuk space, QNB 20s and QIIK 17s are our top picks as both names offer a decent pickup over the sovereign and look attractive relative to peers, in our view. Moreover, following their spread widening of c.60bp over the past few weeks, we think that ADIB tier 1 perps offer an attractive entry level: ADIB has a strong credit profile and would very likely benefit from Abu Dhabi government support, should the need arise.
Contrary to our expectations, GCC oil production increased in April and May, reversing the cuts that took place in Q1 13. However, average GCC oil production rose only to 15.7 mbpd in
April-May, up from 15.5 mbpd in Q1 13, and the 2013 YTD average of 15.6 mbpd remains below the 2012 annual average of 15.9 mbpd. So far, most of the increases have come from Saudi Arabia, whose production rose from an average of 9.1mbpd in Q1 13 to 9.3
Mbpd and 9.5 mbpd in April and May, respectively. So far, these trends remain in line with our
2013 forecasts: we expect average production to slip from 9.8 mbpd in 2012 to around 9.4 mbpd in 2013 in Saudi Arabia and to marginally increase in UAE and Kuwait.
However, we think downside risks to hydrocarbon growth have increased as recent data point to moderate GDP expansion in the US and a sharper-than-expected slowdown in Chinese growth. Our economists have downgraded their Chinese GDP growth forecast from 7.9% to 7.4% for 2013 and from 8.1% y/y to 7.4% y/y in 2014 (China: We cut our GDP growth forecast to 7.4% for 2013 and 2014 on lower growth potential and structural reform, 9 June 2013). While the Barclays Commodities Research team still expects Chinese demand to strengthen in the short term, the lower GDP forecast and an apparent lack of momentum in manufacturing may see Chinese oil demand growth softening towards end of 2013 and into 2014.
Another possible downside risk to production and prices is the recent election of Rouhani as
Iran’s new president. The sanctions-driven shortfall in Iranian crude exports is large, lower by 0.9 mb/d from average levels produced in 2011; combining this with the other geopolitical eventled outages among OPEC suppliers, i.e. Libya, Nigeria and Iraq, brings the tally close to 2 mb/d.
Accordingly, we think the return of Iranian crude to the market following an easing of international sanctions is likely to produce a bigger catalyst, to the downside for prices, rather than the status quo creating upward pressure, where stricter sanctions rolling in over the coming months would remove more barrels from the market.