Nice read:
Contrary To Assertions, Saudi Arabia Can't Endure $30.00 Oil For Long
Mar. 23, 2020 8:34 AM ET
|
9 comments
|
About:
Saudi Aramco (ARMCO)
Gary Bourgeault
Long only, research analyst, portfolio strategy, media
Summary
Why Saudi Arabia's declaration it is fine with oil at $30.00 per barrel is unrealistic and delusional.
The last time they attempted to flood the market with oil it was a disaster.
With Saudi Aramco being the primary economic arm of the country, it faces different responsibilities and pressures than its competitors.
Source:
arabianbusiness.com
As anyone following the oil industry knows, Saudi Aramco's (
ARMCO) CFO Khalid al-Dabbagh
recently stated that the company was "very comfortable" with oil prices at $30 a barrel, adding at that price level it would be able to meet its various obligations, including paying out dividends, if low prices remain in play for a prolonged period of time.
The last time it tried this the country and Saudi Aramco took a beating, and I consider them to have been operating from a stronger position than they are today.
In this article I want to show why they're totally wrong in their conclusions, and why Saudi Aramco can't be considered a typical oil producer; primarily because it's not only nationalized, but is by far the primary generator of wealth in the country.
The issue at hand
All of this came about from the
collapse of the former alliance between Russia, Saudi Arabia, and other OPEC countries. This is turn brought about the declaration by Khalid al-Dabbagh that Saudi Arabia was fine with oil prices of about $30.00 per barrel. The reality is different.
The fact is Saudi Arabia is heavily dependent upon oil revenue to prop up its economy, while Russia's budget can handle lower oil prices for a much longer time.
As for Khalid al-Dabbagh framing the discussion as one of being able to meet obligations to its shareholders, it only tells a small part of the story. Saudi Aramco is unique as a company in the oil sector because it essentially provides for the vast majority of wealth in the nation, along with numerous subsidies its population has grown accustomed to.
When shale oil emerged as a major power in the sector, Saudi reserves tumbled to levels it still hasn't recovered from, and isn't ever likely to.
Since the price of oil plummeted in 2014, Riyadh has been running a deficit. For 2020
the country said it would operate on a budget of $272 million, which was based upon the price of oil being at about $60 per barrel.
As for Russia,
based in terms of oil itself, it has a budgetary breakeven price of $40 per barrel. Based upon foreign reserves, it has a breakeven price of $25 per barrel, which it can run the country on as long as 10 years. The Saudis would last for only about 2 years at longest on a breakeven price of $84 per barrel, according to Oil Price.
Saudi Finance Minister Mohammed al-Jadaan recently announced there would be close to a 5 percent cut in the budget for 2020, representing about $13 billion. There could be more cuts to come if global oil production ramps up and prices fall further.
For at least the next couple of months Saudi Aramco will maintain its current record production rate of 12.3 million barrels a day. Exports are expected to climb to a record 10 million barrels a day by May.
The issue here isn't whether or not Saudi Aramco can produce more oil and flood the global markets, the issue is whether or not it can survive that strategy. It could easily be the major victim of prolonged low oil prices.
At a price of $40 per barrel, the budget deficit of Saudi Arabia would expand to 16.1 percent. If prices fell to $30 per barrel, the deficit would widen to 22.1 percent, according to Arqaam Capital.
As for the rest of the world, most of the companies have to be analyzed on an individual basis as to if they can continue to effectively operate in this low-price oil environment. The under performers will be those companies with heavy debt loads that will be difficult to service in a low-price oil environment.
Conclusion
From the time period of 2014 to 2016,
Saudi Arabia attempted to crush the U.S. shale industry, believing the shale industry couldn't produce oil at a breakeven basis for less than approximately $70 per barrel. They were completely wrong in that assessment, as we all know.
In 2014 Saudi Arabia had foreign reserves of $737 billion. In 2015 they had to spend a minimum of $250 billion of its foreign reserves, reserves they say that are lost forever.
It also went from a budget surplus to a record deficit in 2015 (at that time) of $98 billion. The majority of projections have Saudi Arabia with budget deficits through up to 2028. With breakeven Brent of $84 per barrel, those projections would probably extend further if the country decides to attempt to drive the competition out of the market with more production and lower prices.
The IEA states that OPEC, from 2014-2016, lost about $450 billion in oil revenue as a result of low prices. To return to those levels or worse, at a time they're still trying to figure out how to bolster their foreign reserves and budgets, is unwise to say the least.
It's going to get even more tense amongst OPEC members when they come under enormous stress as a consequence of Saudi Arabia boosting oil production (including tapping oil reserves from storage) and exports.
Not only can Saudi Arabia last for a prolonged period of low oil prices, but neither can other OPEC members.
For these reasons, I don't see Saudi Arabia or Saudi Aramco being able to engage in a price war on the global stage. When shale producers emerged, the oil industry changed forever, and the days of OPEC dictating and managing oil supply and prices was effectively over. It did manage to hold together the lower production levels for a while, but that never had a chance to succeed over the long term.
I think its threat to continue production at high levels, and possibly boost production and exports, is an empty one. It'll probably do that for a short period of time, but when its own citizens start to oppose the loss of perks and subsidies, as they did when the price of oil collapsed in the recent past, it pressured Saudi leadership to change its tactics.
With Russia no longer interested in slashing production levels, it has exposed the weakness of Saudi Arabia and OPEC in the shale oil era, and puts far more pressure on them than it does on Russia and low-cost individual oil production companies that can survive longer than Saudi Arabia can in a period of low oil prices.
It should be understood that Saudi Aramco isn't just an oil company responsible to shareholders and its workers, it has the weight of almost all of Saudi Arabia on its shoulders. This makes it different from and more vulnerable than many of its competitors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
https://seekingalpha.com/article/43...s-saudi-arabia-cant-endure-30_00-oil-for-long
