Anjli Raval
The flow of Opec petrodollars into global financial markets
is set to dry up as the collapse in the oil price delivers a $316bn hit
to the cartel's revenues.
Big oil producers pumped the windfall they enjoyed from soaring oil prices over the last decade into a huge range of global assets, from US Treasuries and high-grade corporate bonds to equities and real estate.
Big oil producers pumped the windfall they enjoyed from soaring oil prices over the last decade into a huge range of global assets, from US Treasuries and high-grade corporate bonds to equities and real estate.
Reza | Getty Images
Shaybah oil site in Saudi Arabia
Qatar, for example, bought the Harrods department store
and Paris Saint-Germain, France's top football club, while Abu Dhabi's
sovereign wealth fund bought a stake in the glitzy Time Warner building
in New York.
Read MoreHow low will WTI go?
The flow of petrodollars into the global financial system boosted
liquidity, spurred asset prices and helped to keep borrowing costs down.
But the 40 per cent fall in Brent crude since mid-June will reverse this trend, as the shrinkage of the oil producers' cash pile removes a pillar of support for global markets.
"This is the first time in 20 years that Opec nations will be sucking liquidity out of the market rather than adding to it through investments," David Spegel, global head of emerging market sovereign and corporate research at BNP Paribas.
BNP estimates that if oil production remains at its current level and oil prices stay at about $70 a barrel for the next year, Opec nations will receive $316bn less in oil export revenues than if oil prices were at their three-year average of $105.
Read More$60 oil means spiking defaults: Pro
George Abed, director for Africa and the Middle East at the Institute of International Finance, said at their peak in 2012, Opec petrodollar flows into liquid investments such as US treasuries, high-grade corporate bonds and equities stood at $500bn. Next year, they could drop below $100bn if prices average $78 a barrel, he said.
This "comes on top of other trends that seem to be sucking liquidity out of the global system," he said.
One of the key factors in the slowing flow of petrodollars is the surge in US oil production. The US is importing less oil than it used to, meaning fewer dollars are being sent abroad: some analysts have said this could lead to a shortfall in dollar liquidity.
Read MoreHow low will WTI go?
The flow of petrodollars into the global financial system boosted
liquidity, spurred asset prices and helped to keep borrowing costs down.
But the 40 per cent fall in Brent crude since mid-June will reverse this trend, as the shrinkage of the oil producers' cash pile removes a pillar of support for global markets.
"This is the first time in 20 years that Opec nations will be sucking liquidity out of the market rather than adding to it through investments," David Spegel, global head of emerging market sovereign and corporate research at BNP Paribas.
BNP estimates that if oil production remains at its current level and oil prices stay at about $70 a barrel for the next year, Opec nations will receive $316bn less in oil export revenues than if oil prices were at their three-year average of $105.
Read More$60 oil means spiking defaults: Pro
George Abed, director for Africa and the Middle East at the Institute of International Finance, said at their peak in 2012, Opec petrodollar flows into liquid investments such as US treasuries, high-grade corporate bonds and equities stood at $500bn. Next year, they could drop below $100bn if prices average $78 a barrel, he said.
This "comes on top of other trends that seem to be sucking liquidity out of the global system," he said.
One of the key factors in the slowing flow of petrodollars is the surge in US oil production. The US is importing less oil than it used to, meaning fewer dollars are being sent abroad: some analysts have said this could lead to a shortfall in dollar liquidity.
The $316bn figure would be much higher if other big oil
exporters including Russia, Norway, Mexico, Kazakhstan and Oman are
taken into account.
Oil prices have fallen amid a surge in US shale production and weakening oil demand in China. Brent slipped further last week after Opec decided not to cut output to shore up prices.
George Magnus, economic adviser to UBS, said the main impact of the reduction of petrodollar flows will be less on liquidity than on investment patterns as wealth is transferred from oil producing countries to consumer nations such as Japan that benefit from a lower oil price.
Read MoreOPEC no threat to US oil growth
"What a sovereign wealth fund might put their money into will be different to what an asset manager might favour. We should expect a lot of churn," he said.
Jason Shoup, analyst at Citigroup, said that the decline in petrodollar growth was "likely to equate to less demand" for bonds.
The shift could also have some bearing on when borrowing costs for governments, companies and consumers start to rise. With consumers spending more, the withdrawal of the Federal Reserve's quantitative easing programme could become "that much more palpable," he said.
However, Alan Ruskin at Deutsche Bank downplayed the impact of petrodollars on US markets as less Opec money has been flowing into the country in recent years.
In a note to clients, he said the size of annual inflows of petrodollars into US dollar and asset markets was "modest relative to total cross border flows". But if stressed oil producers are forced to sell assets to fund gaps in their domestic budgets, that "could in theory be a good deal messier," he said.
Although some countries with huge foreign exchange reserves such as Saudi Arabia are more able to withstand the pain from lower oil prices, others such as Venezuela will only suffer more if crude prices fall. Pierre Andurand, a prominent oil hedge fund manager, said that oil prices could drop to $60 a barrel next year.
Oil prices have fallen amid a surge in US shale production and weakening oil demand in China. Brent slipped further last week after Opec decided not to cut output to shore up prices.
George Magnus, economic adviser to UBS, said the main impact of the reduction of petrodollar flows will be less on liquidity than on investment patterns as wealth is transferred from oil producing countries to consumer nations such as Japan that benefit from a lower oil price.
Read MoreOPEC no threat to US oil growth
"What a sovereign wealth fund might put their money into will be different to what an asset manager might favour. We should expect a lot of churn," he said.
Jason Shoup, analyst at Citigroup, said that the decline in petrodollar growth was "likely to equate to less demand" for bonds.
The shift could also have some bearing on when borrowing costs for governments, companies and consumers start to rise. With consumers spending more, the withdrawal of the Federal Reserve's quantitative easing programme could become "that much more palpable," he said.
However, Alan Ruskin at Deutsche Bank downplayed the impact of petrodollars on US markets as less Opec money has been flowing into the country in recent years.
In a note to clients, he said the size of annual inflows of petrodollars into US dollar and asset markets was "modest relative to total cross border flows". But if stressed oil producers are forced to sell assets to fund gaps in their domestic budgets, that "could in theory be a good deal messier," he said.
Although some countries with huge foreign exchange reserves such as Saudi Arabia are more able to withstand the pain from lower oil prices, others such as Venezuela will only suffer more if crude prices fall. Pierre Andurand, a prominent oil hedge fund manager, said that oil prices could drop to $60 a barrel next year.
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