The International Energy Agency threatens to release reserves, and the euro faces a double test

The International Energy Agency said on Tuesday that member states may consider in the future the possibility of releasing more strategic oil reserves in the markets, if the need arises, while continuing to monitor developments in energy markets.

The agency’s executive director, Fatih Birol, told reporters in Dublin, ahead of a meeting of European Union energy ministers: “We are closely following the markets, especially the markets for petroleum products, such as diesel and others,” adding that “if there is a need, we will of course discuss with the governments of member states to take the necessary steps.”

Birol declined to comment on proposals hinted at by French President Emmanuel Macron and others regarding the release of more strategic reserves with the aim of reducing oil prices.

Saudi Arabia is heading into an economic phase in which geopolitical transformations intertwine with rapid developments in artificial intelligence, energy, and the labor market, at a time when the abundance of information does not necessarily mean ease of decision-making, with the increasing need to sort out variables and identify the most influential trends in the economy and investment.

At the opening of the first edition of the “Servcorp Economic Forum” in Riyadh on Tuesday, Walid Abu Khaled, Chairman of the Board of Directors of Emer for Emerging Markets Intelligence and Research, said that challenges will remain, but what is more important is how to deal with them and turn them into opportunities, pointing out that the challenges facing Saudi Arabia and the world today differ in nature from those that existed in previous decades.

Abu Khaled pointed out that the geopolitical developments related to Iran, the United States, and Israel, in addition to the security of the sea lanes in the Straits of Hormuz and Bab al-Mandab, highlight the importance of Saudi Arabia’s position in the global economic system, especially in the energy sector, describing the Kingdom as “the heart of the global economy” when it comes to energy that fuels the movement of the global economy.

In parallel, he said that artificial intelligence imposes a profound transformation on the labor market, with the acceleration of automation and the use of new technologies in the manufacturing, consulting and programming sectors, raising increasing questions about the jobs and skills that the economy will need in the future.

He pointed out that companies in the robotics sector are moving towards fully automated factories, while he pointed to the use of artificial intelligence in implementing a large proportion of consulting and programming work, considering that technical transformation affects various aspects of the economy, and makes issues of human capital and future skills a major part of the economic discussion.

Saudi Arabia and its global role

For his part, David Godchaux, CEO of the Middle East, Europe and America region at Servcorp, said that Saudi Arabia has witnessed a major transformation over the past 17 years, during which it moved from an emerging market to a major economy in the region, with its growing role at the global level.

He explained that the ease of obtaining information today does not mean that decision-making has become easier, as the amount of available information has increased significantly due to artificial intelligence, social media, and geopolitical developments, which has made the challenge represented in identifying valuable information from among this increasing quantity.

Godchaux added that the “signal to noise ratio” has declined, which increases the need for spaces that bring together business leaders, investors and policy makers to exchange information and read economic trends jointly, noting that the goal of the forum is to find “the signal in the midst of all this noise.”

According to Godchaux, the transformation witnessed by Saudi Arabia has made the economy more diversified, and energy is no longer the only driver of its importance, as the geographical location of the Kingdom and the network of paths that connect it to the rest of the world constitute additional factors that will increase in importance in the coming years.

Flexibility of capital in the face of transformations

Godchaux stressed that the upcoming opportunities require companies and investors to have a greater degree of flexibility and speed in directing capital, whether towards infrastructure projects or attracting the competencies and resources necessary for growth, stressing the importance of making decisions based on reliable and analyzable information.

The Servcorp Economic Forum, which brings together about 150 senior business leaders, investors and policymakers, focuses on the variables that are reshaping the economies of Saudi Arabia and the Middle East, North Africa and Turkey region, including artificial intelligence and productivity, energy and infrastructure, capital channeling, international trade, and the impact of technology on the labor market and future skills.

The forum comes at a time when Saudi Arabia continues to implement the goals of “Vision 2030”, while participants discuss economic transformations from a five-year perspective, with a focus on how to link global changes to the practical decisions of companies, investors and policy makers in the region.

The euro, which is trading near its lowest levels this year against the dollar, faces a double test from a global shock in energy prices and rising political risks in Europe.

The euro was heading towards the $1.20 level in August, but it fell by about 2 percent during September, reaching its lowest levels in two months, just below $1.14, according to Reuters.

While the rise in US interest rates, which reaffirmed the Federal Reserve's hawkishness in combating inflation, strengthened the dollar, the euro's prospects were further clouded by political developments in Europe and a renewed rise in oil prices, which could put pressure on an economy that has so far shown greater resilience than expected.

Jane Foley, chief currency strategist at Rabobank, said: “How long can this economic resilience last? Can it really last through the winter? Then we enter the spring, and we may face a turbulent political scene.”

In Germany, Chancellor Friedrich Merz is facing the repercussions of the success achieved by the far right in the recent regional elections, a surprising development that may prompt him to ease the reform agenda he pledged. In France, markets are under pressure due to concerns about high public debt and political deadlock, with the presidential elections scheduled for 2027 approaching.

“I'm a little concerned about the euro in this environment,” Foley said, adding that her prediction that the euro/dollar rate would reach $1.16 within three months is currently under review.

The premium required by investors to hold French government bonds for 10 years, compared to German bonds rated “EEE”, has risen to more than 110 basis points, in a worrying sign for the euro.

Currency strategists at Bank of America estimate that every additional 10 basis point widening in this gap is associated with a decline of about 0.4 percent in the euro against the dollar.

The euro was last trading at about $1.137.

Options markets have also become more pessimistic towards the single European currency. Three-month “risk reversal” contracts for the euro, which reflect the difference between the prices of options used to buy the currency and those used to sell it, recorded their largest weekly decline since the outbreak of the Iran war last week.

High prices increase pressure on the euro

Although analysts and investors see reasons for euro optimists not to give up their hopes, with markets pricing in a rise in interest rates in the euro zone at least once during the current year, in addition to the steadfastness of the region’s economy; Few would deny that rising energy prices have cast a shadow over the currency's immediate prospects.

The euro rose by about 13 percent against the dollar last year, but the Iran war harmed the currency's performance this year.

The war disrupted LNG shipments through the Strait of Hormuz, pushing gas prices above 80 euros per megawatt-hour during September, their highest level since late 2022.

Analysts believe that European gas prices need to decline in order for the euro to resume its upward path, but this does not seem likely in the near term.

Caspar Hensse, senior portfolio manager at RBC Blue Bay Asset Management, said: “If we look at the expectations of commodity analysts, most of them expect gas prices in Europe to be within a range between 85 and 100 euros.”

He added: “If that happens, the euro could easily fall to $1.12.”

At the same time, talk about the possibility of the United States imposing a ban on diesel exports may increase pressure on the euro, although analysts do not consider this scenario the basis for their expectations.

ING's currency strategist, Francisco Pizzole, said that the rise in the price of oil to about $115 per barrel will increase pressure on the euro, because reaching these levels would reinforce concerns about economic growth.

He added: “But if central banks maintain their strict stance, the euro should not witness a sharp decline,” noting that ING maintained its forecast of the euro rate against the dollar at $1.16 by the end of the year.