Saudi action implies further oil weakness

As Saudi Arabia's actions point to lower oil and a potential asset sale, the US consumer confidence has been relatively stable throughout 2015, and the FTSE 100 strives to end up in the green.

Oil field fire
Source: Bloomberg

Global markets are continuing the rally as we move closer to year end, with the FTSE 100 testing the 6300 level. Time is fast running out for the top UK benchmark to close out the month in the green, yet with the European Central Bank having fuelled a 6% weekly loss earlier this month, it is miraculous that the possibility remains relatively likely. Interestingly, today's FTSE rally comes despite a raft of austerity measures in Saudi Arabia which hints at preparation for further crude oil weakness in 2016.

Today’s decision from Saudi Arabia to implement its own form of austerity speaks a thousand words regarding its willingness to maintain the depressed crude oil prices through 2016. With some speculating that these latest measures imply a $45 crude price through 2016, there is little reason to believe oil prices – and thus commodity stocks – are going to rebound anytime soon.

Given the $98 billion deficit in Saudi Arabia this year, today’s measures are unlikely to be the last. A possible fire sale in the foreign assets held by sovereign wealth funds poses a real threat to Western cross-asset demand. Alternately, the Saudi’s could be the latest in a growing list of countries who remove their peg to the US dollar, which would have significant implications in terms of stability and confidence in a nation that is used to having its own way.

US consumer confidence rebounded in December, regaining much of the ground lost in November, which had initially been thought to have been the worst reading in 2015. However, the positive revision to the November number, alongside the strong December reading, portrays a stable 2015 for consumers which will no doubt provide plenty of positives for the Fed hawks out there. 

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