Below is a recap of the performances of GCC stock markets for the first half of 2011:

2011 has been so far a volatile year for oil prices. Oil prices started the year at the $80 levels, when it shot up to the triple digits level post the Libyan crisis, as 1.5 million barrels a day were cut from the oil market. The past couple of months has seen oil prices on the downward trend. In May, fears of a lack of global recovery (lower US growth, Euro debt crisis) caused questions about demand for oil, leading the price of the commodity to depreciate. Then came June, where supply was the issue rather than demand.

In the oil market in June, we saw two camps rising: A camp that wanted to see oil prices decline, and another camp that wanted oil prices to remain at the triple-digits level. It is not a fight between producers of oil and consumers, as the world’s biggest exporter (Saudi Arabia) was in the former camp, wanting oil prices to decline to reasonable levels. During an early June meeting of OPEC, Saudi Arabia pushed for an innotiative that would see OPEC’s prodcution increase by more than 1 mn barrels per day. Saudi Arabia was supported by Kuwait, UAE, and Qatar, while Iran, Algeria, Venezuela, and Angola opposed the measure. After failing to increase the production targets, Saudi’s Oil Minister called the meeting one of the most disasterous OPEC meetings. The Saudi’s, claiming that high oil prices diminish demand and global growth, went ahead and increased produciton. Kuwait’s oil minister also announced that Kuwait will meet the Global demand for oil. The riveraly between Saudi Arabia and Iran can also be seen politically, where the two nations are trying to control the region, especially turing these turbulent times.

Last week, The International Energy Agency (IEA) came out and said that the are releasing 2 million barrels of oil per day for 30 days to cover the Libyan shortfall, as these high oil prices are hurting global growth. This sent oil prices down by 5%. The IEA’s move is significant as the Agency has acted twice prior to its recent move, once in 1991 during the Iraqi occupation of Kuwait, and again in 2005, during Huracaine Katrine, when the US was in-need of refined products. Though the move is temporary, as the Libyan oil is thought to stay out of services until the end of the year. The IEA’s move can also be seen as a market stimulus, especially during the end of QE2, as the increased supply of oil will lead to lower oil prices, and higher economic growth.

Oil prices went down 12% in June, and are down 20% from their peaks.

It seems that the only positive news we hear about Kuwait is about its Retail sector. A new report is bullish about Kuwait’s retail sector, ranking Kuwait amongst the top 5 retail markets in developing nations. A T Kearney publishes an annual report that ranks the retail market in more than 30 developing nations, assessing thier Country and Business Risk, Market Attractiveness, Market Saturation, and Time Pressure. Kuwait came in fifth (highest in MENA), falling behind Brazil, Uruguay, Chile, and India. The report also measures the attractiveness of the Retai Apparel market, where Kuwait came in third after China and the UAE. Saudi Arabia came in fifth after Russia.

According to the report, Kuwait’s demographic trends have led to retail sector growth of 8 percent annually over the past five years. Overall, retail sales are expected to grow from $8.41 billion in 2011 to $11.92 billion in 2015. Kuwait has one of the highest retail sales per capita of any country in the Index ($4,300) due to Kuwaitis’ high disposable income helped by the welfare state. The key downside to Kuwait is the relatively small market, meaning entry will most likely make sense as part of a regional approach. Saudi Arabia’s market is highly ranked due to its big population and rising income. However, government regulations could hinder entery into the market. The UAE is highly saturated and finding good opportunities in the retial sector is difficult, according to the report.

Oil is breaking new highs on a daily basis. This is worrisome indeed as it exacerbates the evolving inflation story. That mere inflation story may transform into a scary stagflation theme if oil stays high or surges higher, thus, prematurely ending our infant economic growth story.

It is a time of celebration in Kuwait. This may be part of my optimistic view. Yet, a bigger part is actually based on fundamentals. I do not believe oil will maintain the current $114 level or rise further. To support my view, please refer to the charts below which put the contagion risk in perspective. Comforting enough, Saudi’s spare capacity can easily cover production disruptions in Libya and Egypt! Saudi, with minor help from Kuwait and the U.A.E., can also make up for Algeria’s production if it faces issues in the future.

When one combines the above data points with lower demand from slowing emerging markets and ample oil reserves in the U.S., we can deduce that the current rise in oil prices is a temporary fear-driven dislocation in the market. That is why I would recommend shorting oil at these levels.

Two incidents occurred in the Gulf last week that I think are a step forward in the right direction. The first was the Saudi bourse fining Banque Saudi Fransi $13,330 for failing to swiftly disclose changes in its board. The second incident was the suspension imposed on Arabtec’s CEO Riad Kamal from buying or selling shares in the Abu Dhabi Exchange for six months due to him selling shares less than 10 days before announcing news about the company.

These two incidents illustrates the drive in the Gulf for a more transparent market, assauging some fears of foreign investors. The transparency issue has been a key barrier for the inclusion of some the Gulf states within the MSCI emerging market classification, which would lead to increased foreign investment and coverage. The Gulf is moving in the right direction. Hopefully, Kuwait’s Capital Market Authority will be up and running this year!

Kuwait’s Weighted index outperformed the region (given that it significantly underperformed the region in 2009), and Dubai lagged the region (Dubai debt probelms).

The best and worst performers of 2010 on the Kuwait Stock Exchange are:

In closing, we wish you a happy and prosperous New Year, filled with financial joy!

The Blackberry banning virus is spreading all over the world, with countires starting to ban the service within thier borders after talks with Research in Motion, the Blackberry maker, broke down. The UAE and Saudi Arabia have already announced the banning of the service, with Kuwait, Indonesia, and India threatening to do the same unless certain conditions are met. The problem between the phone maker and these countries is that the countires want to setup proxy servers to moniter the Blackberry usuage (i.e. moniter emails, messages, etc.), which the company is refusing to do so. But there might be light at the end of the tunnel, as India may have reached an agreement with RIM, and Kuwait announced yestersday that RIM has agreed to block 3,000 porn sites.

This news led me to the question of the impact of the Blackberry’s ban on RIM’s earnings. The biggest market for the Blackberry is the US, followed by Canada (home of RIM), then the United Kingdom. The rest of the world contributes to 27% of the company’s revenues. The UAE and Saudi Arabia contribute a very small part of that, thus the ban in these countires has a minimal effect on the company’s earnings. However, India and Indonesia are both a bigger threrats. The two countries, two of the most populus countries in the world, contribute more to RIM, and represents a very ripe environment for future growth.

My bet is the effect of the ban on the local telecommunication companies is far greater than on RIM. Also out of the four companies (STC, Etisalat, Mobily, Du), Du and Mobily will be affected the most as these two companeis are concentrated within the UAE and Saudi Arabia, respectively, as STC and Etisalat have large busniess operations spanning through numerous countries.

We can see from the graph that Iraq is the highest, i.e the most change in the Dollar amount since 2005, mainly due to the reconstruction of Iraq after the war. The UAE comes second. But what is interesting to see is that in April/May of 2009, developments in the UAE dropped substantially, since many companies cancelled their projects due to liquidity constraints. No other country saw that big of a drop. What made me curious is that Qatar is the most lagging country among the pool, which is hard to believe since we hear a lot about projects in Qatar, especially relating to the Oil and Gas industry.

It seems that the UAE was right all the way when it pulled out of the new GCC Monetary Council after Saudi Arabia, home to the world’s largest proven reserves of crude oil, was selected to house the proposed central bank.

Last week, Saudi Arabian Monetary Agency (SAMA) governor Mohammed Al-Jasser was elected the first chairman of the GCC Monetary Council in Riyadh and Rasheed Al-Maraj, Bahrain Central Bank governor, was chosen as his deputy. Both will hold the positions for one year before the slots rotate to Kuwait and Qatar.

The Appointment of Mohammed Al-Jasser underscores Saudi Arabia’s dominance in the single currency project. Back in May 2009, the UAE withdrew from the GCC Monetary Council when Riyadh was chosen to host the Gulf Monetary Council. It feared that Saudi Arabia would have more control over the union since Riyadh was the headquarter of the GCC council. Well, today we can all agree that Saudi Arabia obviously wants it all! While at first it was only fair that Saudi Arabia would host the Council as it is the largest economy in the Gulf region.(47% of GCC GDP). Today, it’s nothing close to fair when compared to the European Central Bank, where the two largest economies share control of the ECB with Germany playing host and France appointing the head.

“From Saudi Arabia’s position, it shows a clear commitment to bring all the countries closer together and move toward the currency union,” said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi-Credit Agricole Group.

Is Saudi Arabia really demonstrating a clear commitment to bring all the countries together and more towards the monetary union? Or is it simply enjoys control?

We have been covering the whole GCC Monetary Council debacle at Alpha Dinar as it evolved. Below is a list of previous articles in chronological order:

• Did the UAE Pull the Trigger on the Gulf Monetary Union?
• Saudi Arabia to UAE: GCC Central Bank location is final.
• Part 1 of Saudi Retaliation: SEARCH ALL those Trucks!
• UAE Back in GCC Monetary Union? Probably.