Saudi Arabia's Financial Crisis

The Saudis are in more financial trouble than you might think, and while this threatens the Kingdom's grip on power to some extent, it's a threat the Crown Prince will weather.

Still, it is with some unease that the Saudis had to close a $10-billion, one-year loan this week, the funds of which will likely end up backing the 70% stake in SABIC that it forced Aramco to acquire last year.  

It is also with some unease that the Kingdom has tripled taxes on basic goods (an increase of 15%) and cut spending by some $26 billion on major projects that were supposed to turn the reputation of MBS from brutal assassin (among other things) to progressive visionary. But the coronavirus pandemic was never factored into this legacy equation, and its cost coupled with the oil price war that cost everyone dearly has been immense.  

But the Saudis have access to money, such as we saw this week with the $10-billion, one-year loan. They are funds in multiple places that they can tap into--from SAMA to the Central Bank reserves, even if those reserves are lower than they used to, and even if that is not the ideal. All the Saudis need to do is keep paying wages to weather the storm, though there may be some blowback from the basic goods tax hike, which is the critical thing to keep an eye on right now. 

To the ongoing question as to whether the Trump administration will come to the aid of the oil industry, the answer appears to be no. While the Federal Reserve in late April changed lending rules allow companies to qualify for aid and while the Energy Department will allow oil companies to store oversupply in the strategic reserves, not much more is likely to be forthcoming, including any attempt to stop the Saudi barrels from hitting US shores and adding more supply. When that crude lands, it could offset (depending on the timing) all the OPEC+ cuts made in March, and then we're back to square one. 

In the meantime, Saudi Arabia has moved to slash oil exports to Asia in June (a fairly significant sacrifice given the market share battle) and also to Europe and the United States at that time, in an apparent attempt to lend Trump a helping hand and avoid the president having to defend this relationship ahead of November elections. It may not be enough.  

Sustainable Investing

As the pressure on Big Oil continues to mount in the form of the megatrend of sustainable, impact, or "ESG investing", Norway's sovereign wealth fund has divested its shares in trading giant Glencore, Anglo American, RWE, Sasol and AGL Energy for breaching its guidelines on the use of coal. 

This is a highly significant move that further solidifies the trend toward sustainability in the energy section as the Norwegian fund was the leading shareholder in each of these companies. It owned 1.2% of Glencore, 2.4% of Anglo American, 0.6% of RWE, and 0.5% in Vale. 

In recent years, Norway's parliament has tightened the rules about what the oil fund can invest in, adding big coal extractors and users to producers of tobacco, nuclear weapons, and cluster bombs to those excluded.

But it's not just Norway, and it's not just coal. 

Norway's is a trillion-dollar fund and the largest SWF in the world. It's also divested from four Canadian oilsands companies--Suncor, Canadian Natural Resources, Imperial Oil and Cenovus Energy. When the fund withdrew this week, the four saw their shares plunge. That's what happens when a fund owns over a billion in stock in the companies and then pulls the plug. 

This is where the real divestment begins, with Big Oil itself shunning coal and oilsands and then fossil fuels in general. A decade ago, it was a moral, climate argument that didn't exactly catch on. Today, it's a market argument with a moral side benefit to make you look good. The only real pressure is market pressure, and it's now officially the beginning of the biggest trend in the energy industry.