Persian Gulf Markets: Too Far, Too Fast

by: Gary Dorsch

In a strange twist of logic, the Persian Gulf Arab stock markets which ranked among the best performing in the world in 2004 and 2005, have crashed to earth in the past two months. The Saudi All-Share index dropped to 12,076 points on April 23rd, slashing the capitalization of the Arab world's largest bourse by more than 42% from its all time high in February. The Dubai Financial Market is 52% off its peak.

The Saudi market was trading on a price-to-earnings multiple above 40 and the UAE was above a P/E ratio of 30, well above their long term average p/e of around 15. But those multiples could be justified by expectations of significantly higher oil prices that are now being realized.

However, tension over Iran's nuclear weapons program has battered investor confidence across the world's biggest oil-exporting region.

US Oil compared to Saudi All-Share Index:

Other analysts noted a gap between Saudi profit growth of 305% and stock market gains of 450% over the past few years. Thus, despite the outlook for higher oil prices and the prospect of a record $150 billion oil surplus for the Gulf region for 2006, Saudi share prices had risen too far, too fast, ahead of profits. A correction of share price levels that were 50% above profit growth could be expected.

From a purely technical perspective, the meltdown in the Saudi All-Share Index looks very similar to the meltdown pattern of Japan’s Nikkei-225 stock index in 1990. The SASI is searching for a level where bargain hunters can emerge and set-up a technical bounce. However, a third leg down could ultimately be in store, and if correct, bottom pickers could get burned.

OPEC Oil Price Basket compared to Saudi All-Share Index:

And if that were not enough, more volatility lies ahead for energy markets and precious metals, thanks to Iranian President Mamoud Ahmadinejad “Those rich and industrial countries that have billions of dollars in income should pay the real price for their crude oil," Ahmadinjad said on April 21st, intimating that $100 or more for a barrel of oil was an appropriate level.

Thus, Ahmadinejad has already unleashed the “Oil Weapon” on the industrialized West without cutting back a single drop of oil. Ahmadinejad is firing on all cylinders, jawboning crude oil prices sharply higher by upping his anti-Israel rhetoric and showing off Tehran's close ties with Palestinian and Iraqi militant groups. He speaks of the US as being in a "quagmire" in Iraq, and has no fear of a US attack.

US Light Crude Oil:

Libya's top oil official Shokri Ghanem said on April 23rd that fears of US military action against Iran had added $10 to $15 to the cost of a barrel of oil. Other producers blame a lack of planning in consumer nations, particularly the United States, which uses a quarter of the world's oil and over 40% of its gasoline but has not built a new refinery on its soil for decades.