Saudi Arabia might have been conning the world all along in its oil price war with Russia. When Riyadh flooded the market with cheap crude in the aftermath of its fallout with Moscow and OPEC+, the kingdom may have had opportunistic plans to target the United States and Europe. As the global financial markets tried to contain the Coronapocalypse, the Saudis quietly amassed noteworthy positions in Big Oil stocks and other assets around the world. Was Russia a party to this ploy? Or was it a useful idiot?
The Saudi Shake
Before crude oil prices crashed 300% to negative territory, West Texas Intermediate (WTI) and Brent plummeted to 20-year lows following the Saudi Arabia-Russia spat. The decline sent oil stocks plunging to their lowest levels since the bear market several years ago.
It turned out that Gulf sovereign wealth funds, including Saudi Arabia’s $320 billion Public Investment Fund (PIF), took advantage of the situation. The government established a team to assess lucrative mid- and long-term opportunities during the COVID-19 crisis. A senior Saudi official told the Financial Times that PIF, which is chaired by Crown Prince Mohammed bin Salman, participated in a strategy that was a “mix of strategic and opportunistic.”
In recent weeks, Saudi Arabia purchased stakes worth about $1 billion in a few major European oil companies: Royal Dutch Shell, Norway’s Equinor, Italy’s Eni, and Spain’s Repsol S.A.
The idea is that the share prices of these firms are facing a correction, and the dividend yields are quite substantial. With a bullish long-term outlook for oil prices, the Saudis could not resist.
But Saudi Arabia is not only scooping up energy firms. The country is looking to diversify its economy by acquiring an interest in a wide variety of companies, from telemedicine to logistics to technology. The government made headlines for purchasing an 8% stake in the world’s biggest cruise line, Carnival. It even plans to buy English football club Newcastle United in a $375 million deal.
Does this make Riyadh the winner? Christian Malek, the head of EMEA oil and gas equity research at JPMorgan Chase, thinks so. He told CNBC:
“Ultimately, Saudi is a winner. They have managed to get out the door early selling oil while there was demand and then retracted that in their latest cut — which we view as a weak deal.”
US and Russia
How do the United States and Russia factor into all of this? As crude prices continue their freefall, the Saudis may have simultaneously ended America’s energy revolution and hurt Moscow’s production efforts.
Due to unprecedented collapse, many smaller U.S. oil firms are declaring insolvency, shutting down, or even paying companies to dispose of their oil. The larger companies are slashing their capital expenditures in the billions, and there are reports that some of the power players might reduce their dividends. This is a boon for Saudi Arabia after witnessing its international market share erode due to the U.S. shale revolution in recent years.
President Donald Trump tweeted that he is requesting Treasury Secretary Steven Mnuchin to devise a plan to extend financial relief for oil and gas businesses “so that these very important companies and jobs will be secure long into the future.” How much aid he is seeking is unclear, but it would serve as a lifeline for a struggling industry. The next question is: Will only Big Oil receive compensation or will the independents also attain some relief?
Russia has ordered producers to cut output by 20% from February levels. Next month, Russian businesses will reduce production by 2.5 million barrels per day (bpd). Companies – private and state-owned – have acquiesced to the requests as they already had plans to minimize their exports anyway. In any market, this would be positive for Russia and global markets, but since OPEC and its allies have already altered their operations, it may be a case of too little, too late to lift futures contracts. The country’s economy relies on energy to survive, so without prices trading north of $45 a barrel, the fruits of its efforts will not be realized until maybe the second half of 2020.
The Crude Virus
The crude virus is comparable to the Wuhan Coronavirus, spreading throughout the world and devastating entire industries and markets. As leading health authorities anticipate the worst, so too are oil observers. COVID-19 proved that it does not discriminate, infecting any host it wants – from the rich and powerful to average folk. But while Saudi Arabia and Russia thought they were immune to this oil outbreak and were the winners in this possible farce, they will inevitably endure the same fate as other energy powerhouses: financial ruin.
Read more from Andrew Moran.
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