The great Saudi cash burn
http://ftalphaville.ft.com/2015/05/01/2128365/the-great-saudi-cash-burn/
There were those who said it would never happen. Then there were those who said it wouldn’t matter even if it did happen. And there were those who recognised Saudi Arabia was probably panicking about the prospect of a destabilising cash burn situation as soon as the term Saudi America became a thing.
But, as the FT reports on Friday, Saudi cash burn is now not only a big thing, it’s an accelerating big thing:
Most would say the sheer size of reserves ($708bn) means the Kingdom has a good chance of achieving this objective in the long run.
But, as Olivier Jakob of Petromatrix noted this week, we must also be conscious of the power shuffle going on within the Saudi leadership:
But, we’d argue, there is something else to consider: the hypothetical eventuality of no more petrodollars, the legacy role of petrodollars propping up the eurodollar market, and the Saudi riyal’s dollar peg.
To what degree, in other words, is Saudi a de facto dollar lender of last resort to the emerging world? Could Saudi be using its own balance sheet (repo dollar loan-style) to support the dollar needs of the wider emerging market network on which it depends on for oil demand?
If so, we would propose looking beyond game theory analysis of simple oil market supply fundamentals, towards Saudi’s interest and significant capacity to prop up the oil market with dollar loans.
Remember, Saudi has historically proved a risk-averse dollar investor with a penchant for US Treasuries and US dollar bank accounts. Yet calls for it to become a more active and aggressive investor have been growing for months. Who needs a sovereign wealth fund if you can just transfer loans directly instead?
Related links:
Opec compromised; Saudi Arabia becomes lone player – FT Alphaville
Why Saudi Arabia’s best bet may be to increase output – FT Alphaville
Welcome to Saudi America - FT Alphaville
Busting currency pegs, Saudi Arabia edition – FT Alphaville
But, as the FT reports on Friday, Saudi cash burn is now not only a big thing, it’s an accelerating big thing:
The central bank’s foreign reserves have dropped by $36bn, or 5 per cent, over the past two months, as newly crowned King Salman bin Abdulaziz Al Saud dips into the rainy-day fund and increases domestic borrowing to fund public-sector salaries and large development projects.Which speaks, err, literal volumes about the near-record amount of crude Saudi is currently pushing into the market. As JBC Energy reported today:
JBC Energy’s assessment for OPEC crude output in April sees this having jumped to 30.9 million b/d, up 125,000 b/d from March. The uptick comes mostly due to higher Saudi Arabian production and a partial Libyan recovery, and thus brings the average of the last two months some 1.2 million b/d higher compared to Mar-Apr 2014. The very high levels of production in the world’s top crude exporter for March were not a one-off as the Kingdom continues to produce near record levels.The logical explanation is that Saudi Arabia is engaged in a race to the bottom with US shale producers, and is now prepared to throw everything it has at the market just to ensure it is the last man standing when everything settles down.
Most would say the sheer size of reserves ($708bn) means the Kingdom has a good chance of achieving this objective in the long run.
But, as Olivier Jakob of Petromatrix noted this week, we must also be conscious of the power shuffle going on within the Saudi leadership:
Three months after his appointment, the new Saudi King not only started an air campaign on Yemen but also ordered today a major domestic power reshuffle. Muqurin (his mother was Yemeni) has been replaced as Crown Prince by Bin Nayef; Al-Faisal the Foreign Minister has been replaced by Al-Jubair the ambassador to the US. Al-Falih, CEO of Aramco was nominated as health minister and Aramco chairman (replacing Al-Naimi), bringing some speculation that he could become the next oil minister. Al-Naimi is still oil minister (but for how long?) and a new Aramco CEO has not yet been nominated. Al-Naimi’s oil minister’s clock was already ticking before the death of King Abdullah, the ticking is now getting much louder.Reading between the lines suggests more crude dumping by Saudi, more cash-burning to fund that dumping, and an increasingly destabilised Opec cartel.
This is probably not the last reshuffle and we need to keep in mind that the King’s son, Prince Abdulaziz, as deputy oil minister is also still waiting in the wings for a more rewarding position. The current reshuffle and the ones still to come thus provide an additional layer of uncertainty about the oil policy of Saudi Arabia in front of an upcoming OPEC meeting and of the likely return of Iran to the world’s oil markets over the next 12 months. Prince Abdulaziz however found an occasion yesterday to mention to the press that “Saudi Arabia is interested in maintaining its share in the market” and that the oil market is in “excellent condition”.
But, we’d argue, there is something else to consider: the hypothetical eventuality of no more petrodollars, the legacy role of petrodollars propping up the eurodollar market, and the Saudi riyal’s dollar peg.
To what degree, in other words, is Saudi a de facto dollar lender of last resort to the emerging world? Could Saudi be using its own balance sheet (repo dollar loan-style) to support the dollar needs of the wider emerging market network on which it depends on for oil demand?
If so, we would propose looking beyond game theory analysis of simple oil market supply fundamentals, towards Saudi’s interest and significant capacity to prop up the oil market with dollar loans.
Remember, Saudi has historically proved a risk-averse dollar investor with a penchant for US Treasuries and US dollar bank accounts. Yet calls for it to become a more active and aggressive investor have been growing for months. Who needs a sovereign wealth fund if you can just transfer loans directly instead?
Related links:
Opec compromised; Saudi Arabia becomes lone player – FT Alphaville
Why Saudi Arabia’s best bet may be to increase output – FT Alphaville
Welcome to Saudi America - FT Alphaville
Busting currency pegs, Saudi Arabia edition – FT Alphaville
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