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Tapped out

6 January 2015 By Swaha Pattanaik

Low oil prices hurt energy producers. They may hurt financial markets too.

For years, energy windfalls were large enough to give major oil producing nations surplus cash. Exporters accumulated foreign exchange reserves and put money into funds which aimed at stabilising economies, paying pensions or just earning a return on investments. The total assets under management of these “petrodollar” investors increased by $2.5 trillion between 2009 and 2014, according to Citi analysts’ calculations.

But the direction of cashflow has changed. The halving in oil prices between June 2014 and January 2015 has left energy producers with a cash shortfall. So for the first time in nearly two decades, they are more likely to dip into savings than to add to them, BNP Paribas analysts forecast.

Saudi Arabia, the largest exporter, has already announced it will draw on reserves to fund a big budget deficit. It won’t be alone. BNP expects emerging market energy producers to draw down their savings by a total of $211 billion in 2015, if oil prices stay below $70 a barrel.

When big investors move from buying to selling, markets suffer. It is difficult to tell which asset prices are most vulnerable, since the petrodollar fund managers are mostly quite secretive about the size and composition of their portfolios.

Most analysts think that a good chunk of the money was parked in government and corporate debt, so sales would be a drag on bond prices. This might not show up clearly in a market as large and liquid as U.S. Treasuries, especially when global investors are suffering from a bout of risk aversion.

But such a shift might exacerbate falls in other assets. Perhaps some petrodollars holders are starting their reconfiguration by trimming their riskiest liquid holdings. That means shares. No one can be sure, but the petro-drag could be part of the explanation for the stock markets’ dismal start to 2015.

For Saudi Arabia and its rich exporting peers, a big pot of savings will defer the pain of low oil prices. Markets may already be feeling the hurt.

 

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