SAUDIS FEEL THE HEAT AS THE U.S. UPS THE PRESSURE ON OIL

SAUDIS FEEL THE HEAT AS THE U.S. UPS THE PRESSURE ON OIL

Saudi Arabia  made what has been described as  a surprise announcement,  it will voluntarily deepen its crude oil output cuts. The announcement stated that this voluntary output cut would take effect from June.

The cut is an additional  1 million barrels per day which will reduce Saudi  production to the lowest level in 18 years. The ostensible reason given by the Saudis is to  hasten  a recovery from the crash in oil price benchmarks which has pitched them  into austerity. According to Energy Minister Abdulaziz bin Salman Al Saud, Saudi Arabia wanted to be ahead of the curve.

The cut is an additional  1 million barrels per day which will reduce Saudi  production to the lowest level in 18 years. The ostensible reason given by the Saudis is to  hasten  a recovery from the crash in oil price benchmarks which has pitched them  into austerity. According to Energy Minister Abdulaziz bin Salman Al Saud, Saudi Arabia wanted to be ahead of the curve.

" We want to expedite the process of returning back to normal ... demand is picking up. We want to make sure that we are helping to expedite the equilibrium between the supply and demand,” he told Reuters in a telephone interview.

 

“We are taking a proactive role and we are encouraging others to do the same,” he said, adding that Riyadh’s deeper cuts are “not conditional or restricted to us alone”.

 

The Saudi government's actions are far from altruistic and really should not be a total surprise. They, the Kuwaitis and the Emiratis understand  price recovery  is a function of  market sentiment as well as fundamentals. Their efforts to drive up oil price benchmarks requires demonstrating to the market their new found willingness to act flexibly to further drain global inventories. Essentially acting to make  a virtue out of a necessity.

 

The move comes in the wake of the U.S. pulling two Patriot missile batteries and some fighter aircraft out of Saudi Arabia,  amid tensions between the kingdom and the Trump administration over oil production. Whilst there has by no means been a causal link identified between both events, it is not a stretch to see how one could exist. The mood in the US Capitol towards Saudi Arabia is far from effusive at the moment. In fact Congress have threatened to pass the NOPEC Act to strip the Saudis and OPEC member states of their sovereign immunity and sue them under existing U.S. anti-trust legislation.

 

Congress fully expect Saudi Arabia to act in a manner that supports US oil producers regardless of Saudi's own economic interests. The age-old relationship between Washington and the House of Saud is inviolate as far as the US are concerned. It is premised on Riyadh supporting US energy needs whilst enjoying its protection. Any deviation from that relationship is seen as outright betrayal by Washington. That the US is a lot less dependent on Saudi oil does not release the Kingdom from its implied obligations, if anything it allows Washington to be more vociferous in enforcing them. When President Trump stated to King Salman, the House of Saud would not last 2 weeks without US military support, his warning was unequivocal. It seems the recipients got the message.

 

 

In order to attract investors to its initial public offering  the Saudi Arabian Oil Co.  aka  Aramco  pledged an annual dividend of $75 billion for the first five years . This was before the black swan arrived , It now seems unlikely that it will be unable to maintain that   dividend payment to the Saudi government, whilst attempting to protect the dividend payment  to minority shareholders .  Though the dividend payment for Q1, 2020 of $18.75 billion is in line with their  commitment.  Despite that  Net income for the 3 month period ending March31, 2020 was SAR62.48 billion ($16.66 billion) compared to SAR83.29 billion ($22.21 billion) for the same period in 2019, a drop of over 25%.

 

The plunge in crude prices has created severe economic hardship for the Kingdom and raises questions about the wisdom of the decision to place their economy in further peril by initiating a damaging crude oil price war. Clearly as events have unfolded their actions seem more reckless and less thoughtful. Despite the transient increase in volumes supplied  into  the Asian market and China last month, obtained  through a discount  race to the bottom. If the outcome could be deemed a victory, it has turned out to be a pyrrhic one. There appear to be few tangible long term opportunities or benefits accruing to the Saudi economy from the price war. Not to mention  the political fall out with Washington.

 

Indeed the Saudis have announced a slew of austerity measures to cope with the impact of the coronavirus pandemic and the  ill fated  oil price war. In unprecedented actions the Saudi authorities have tripled  its value-added tax and slashed  a raft of cost-of-living allowances for government workers. These measures are expected to generate 100 billion riyals (€24.6 billion) in total, according to Finance Minister Mohammed Al-Jadaan. But more importantly they are a measure of the Saudi economy.

 Shortly before the measures were announced, King Salman ordered a payment of 1.85 billion riyals to be distributed to state welfare recipients to mark the Islamic holy month of Ramadan. The payments will include 1,000 riyals for each family and 500 riyals for each dependent. The kingdom has announced other stimulus packages , including interest-free loans, a discount on electricity bills, deferments of fees and a government guarantee to cover 60 per cent of salaries for some Saudi workers in the private sector.

 

According to Moody's credit review the new fiscal austerity package should help offset a portion of this year’s revenue loss caused by the sharp decline in oil prices and lower oil production,  Moody's said the decisions point to the government’s capacity to adjust to shocks. The new spending cuts, together with those already announced in March and those approved in the 2020 budget, are equivalent to nearly 8% of GDP. However the increase in tax will affect retail purchasing and  detrimentally dampen overall  consumption. VAT a flat rate tax will disproportionately affect the less well-off and undermine the competitiveness of what little local manufacturing exists.

 

That  the Saudis have taken the quite radical fiscal measures they have,  exposes the desperation of the Government and its willingness to tempt social unrest as there is a real risk of pushbacks. Their desperation lays bear the false equivalence fallacy that lies at the heart of the low cost producer advantage and MBS policy faux pas. The Saudis can seize market share by undercutting competitors based on their low cost of production and spare capacity. But the crucial metric is the barrel price the country needs to sustains the generous social benefits enjoyed by  their citizens in a competitive low tax environment. In the on-going price war, the Saudi aggressive predatory pricing acted as a catalyst in distorting and collapsing the barrel complex. It now appears albeit with a little jab  from Washington, Riyadh is now wide awake

 

 

 

 

 

 

 

 

 


Subscribe to this blog post Unsubscribe Print

Related Posts

 

Comments

No comments made yet. Be the first to submit a comment
Already Registered? Login Here
Guest
Tuesday, 09 August 2022
If you'd like to register, please fill in the username, password and name fields.

By accepting you will be accessing a service provided by a third-party external to https://www.synterra.co/

Synterra Energy Assets
72 Newman Street, London W1T 3EH
+44 788 084 2065
tex@synterra.co

Search