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Cyril Widdershoven
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The latter results stand in stark contrast to the ongoing OPEC+ optimism that markets are recovering slightly. The Saudi giant, still valued at around $2 trillion, is fighting an uphill battle due to an ongoing market crash and slump in demand due to the pandemic. For Q4 and the H1 2021 it can be even expected to show even lower results, as oil prices are in flux, showing increased negative sentiment in the market and the still unclear negative repercussions of the re-introduction of lockdowns in major markets in the OECD. A possible US presidential election victory of Democrat contestant Joe Biden could even worsen the market situation as some expect a re-emergence of Iranian oil and gas to the market.

Aramco indicated also that the company’s figures have been slightly improved due to changes in royalties to the government. Some losses have been partly offset by a decrease in crude oil production royalties resulting from lower prices and volumes sold. At the same time, Aramco has benefitted from a decrease in in the royalty rate to 15% from 20%, lower income taxes and zakat. The oil giant also shows an increase in revenues due to higher gas product sales. Overall hydrocarbon production for Q3 is set at 12.4 million barrels of oil equivalent per day, of which crude oil made up 9.2 million bpd.

The overall financials also improved due to lower capital expenditures, now reported to be $6.4 billion. For the whole year, Aramco indicated that total capex for 2020 is expected to be at the lower end of the $25 billion to $30 billion range for 2020. The latter is still above the average in the sector, but shows that even the Saudi low cost producer is having a hard time to keep up its overall capex, possible resulting a further delays of new projects or some even being put totally on ice. It will be very interesting to keep an eye on Aramco’s investments and operations in the Red Sea region, and its flagship Ras Al Khair Shipyard project.

Aramco CEO Amin Nasser keeps up a positive mood, as he stated that “we saw early signs of a recovery in the third quarter due to improved economic activity, despite the headwinds facing global energy markets.” Aramco also seems to take an aggressive position in contrast to its IOC competitors, as it keeps total dividend payments at the historical levels.

Nasser stated “we maintained our commitment to shareholder value by declaring a dividend of $18.75 billion for the third quarter.” The latter however needs to be reassessed, as it seems that the Aramco dividend position is becoming critical, as the company’s free cash flow is $12.4 billion in the third quarter, falling short of its dividend commitment. The current dividend position is however based on Aramco’s IPO statement that it will issue $75 billion in dividend annually for five years.

With a global oil and gas market being shattered by COVID, growing economic instability and a possible widespread recession knocking on the doors in OPEC+’s main markets, optimism is at present too high. No fundamentals are showing that growth predictions of the global economy are even going to be as expected, while demand is again being battered in OECD and other markets. The green shoots that emerged during the Summer and Q3 are now being cut by force.

Low prices and possible new oil glut scenarios should be assessed but it seems this strategy is officially not on the table of OPEC+ main producers. Weaker refining margins seems to be continuing, as air traffic and even road traffic will be hit again very soon. First signs are already in the market, as VLCCs and other maritime offshore storage options are again heating up as demand is growing.

Aramco’s internal messages are also partly diffuse. Optimism being shown by Aramco’s CEO Nasser and Saudi officials at OPEC stand in contrast to warnings being given by Aramco Trading’s VP Ibrahim Al Buainain, who stated the last days that OPEC+ will have to contend with a “lot of demand issues” before raising supply in January 2021.

A possible implementation of a new more flexible OPEC+ production volumes strategy could bring the market straight away into a glut situation. If OPEC+ decides to lower its production cuts by 2 million in January, more oil is going to be on the market, without clients. January 2021 could also be more critical if Libya’s production is increasing further, Iran is becoming more active and other smaller OPEC producers are opening up their taps. Al Buainain warned already for continuing lower margins, as demand for products is lower.

Q4 could be a watershed, if Aramco and its counterparts are not looking more at real facts on the grounds. Chinese demand is going to show most probably no real changes, as Beijing is keeping a low cost oil buying spree in play. The latter however is not able to be kept for a long-time in place, while demand in OECD will be down again, also resulting in lower demand for Chinese products.

NOCs like Aramco will have to cope with pressure of their own governments, which need higher revenues to counter deficits, but at same time have to be able to stabilize the market. At present, the two issues are constraining each other. OPEC+ is a major market force, but it is not able to reform or shape the buyers=market situation at present. It is also worrying to see low-cost producers such as Aramco feeling the heat at present. IOCs, not known for their cheap oil production are being squeezed like hell the coming months. In the long-run IOCs, such as Shell, BP, Total or Chevron, will suffer from all sides.

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