Saudi riyal under pressure: Gulf markets in chaos as oil slumps

World Oil Reserves

Gulf debt and equity markets dropped on Tuesday. The Saudi currency, riyal, dropped on the forward market after U.S. crude oil futures plunged below $0 on a supply surplus caused by coronavirus.

Combined with other economic strains triggered by the Covid-19 outbreak, plunging oil prices hurt the Gulf countries’ budgets. Which depend heavily on crude exports, and their currencies are also under pressure.

Artur Baluszynski, head of research at investment management firm Henderson Rowe, warned that amid the OPEC agreement to slash over 10% of the global oil supply, oil prices continue to fall. He noticed that while negative WTI futures price of one day may have been a one-off mistake. It suggests that there is trouble ahead.

U.S. crude oil futures (WTI) plummeted on Monday for the first time in history as demand cratered. Even, Brent crude, the world standard, slumped, although that contract was not as weak.

Mohammed Ali Yasin, Head of Policy at Al Dhabi Capital, said most of the market turmoil was sentiment-based. Adding that people don’t understand why this happened so quickly. Giving the answer to the question of whether that price is the one at which governments have to sell oil. He said it isn’t, but it will take them some time to understand.

The Saudi stock index (TASI) fell 1.5% at the open market with Aramco (SE:2222) down 1.7%.

Dubai market shares (DFMGI) dropped 1.4 percent while the Abu Dhabi index (ADI) dropped 0.5 percent and Kuwaiti’s leading index <.BKP> fell 2 percent.

Saudi Arabia’s insurance costs against a possible debt default. The world’s largest oil exporter increased slightly to 168 basis points from 166 on Monday, according to IHS Markit numbers. It’s up 13 bps last week.

Meanwhile, US dollar-denominated bonds issued by Saudi Arabia. Oman and Bahrain dropped between 0.5 cents and 2 cents. And Aramco’s 2049 paper fell nearly 1 percent, according to Refinitiv.

DOLLAR PEGS UNDER PRESSURE?

The Saudi riyal fell against the dollar in the forward market. It’s connected to the spot market’s U.S. currency at 3.75, and banks often use the forward market to protect against risks.

Nine-month dollar/riyal forward, the trades are due to take place in nine months. It went as high as 148 points, up from the close of 60 points on Friday. Their highest level since November 2017. Refinitiv data showed them last at 110 points.

One-year forward rose to 210 points, flirting with Monday’s near 2-1/2 year-high 211 score.

The crash of oil prices has led to renewed pressure on Gulf dollar pegs, Jason Tuvey, Capital Economics’ senior emerging-market economist noticed.

On Tuesday, except the Saudi riyal, other currencies didn’t change much.

As Paul McNamara, GAM’s investment officer predicts, people will want to go long dollars, but not because they believe the pegs will actually break, but because there will be some people betting on it.

He added it’s one of the things you’d see before people got lost again.