Saudi Arabia is sliding toward a crisis…
As you likely know, the price of oil has crashed since last summer. In June 2014, oil peaked at over $106/barrel. Today, oil trades at just $44…good for a 58% decline.
The oil crash has crushed oil stocks. Exxon Mobile Corporation (XOM), America’s largest oil company, has dropped 19% since July 2014. Chevron Corporation (CVX), America’s second-largest oil company, has dropped 29% over the same period. The SPDR® S&P® Oil & Gas Exploration & Production ETF (XOP), which tracks the performance of the largest U.S. energy companies, has fallen 35% in just the past year.
Things are probably going to get worse for the oil sector before they get better. As we’ve explained, oil companies have already shut down $200 billion worth of projects this year. But more shutdowns are likely coming. Energy consulting company Wood Mackenzie estimates that a stunning $1.5 trillion worth of oil projects in North America can’t make money at $50 oil.
• Saudi Arabia is the world’s largest oil producer…
It supplies 13% of the world’s daily oil production…or more than one in eight barrels produced worldwide.
No other country depends on oil money as much as Saudi Arabia does. Oil sales account for 80% of the Saudi government’s revenue. And Saudi officials have used oil revenue to pay the country’s bills for years…
High oil prices have helped Saudi Arabia earn far more than it spends. Over the past decade, the government averaged an annual budget surplus equal to 13% of the country’s gross domestic product (GDP).
• But due to the oil collapse, Saudi Arabia is now facing its first budget deficit since 2009…
The International Monetary Fund (IMF) expects the Saudi government to run a budget deficit equal to 22% of its GDP this year…and another deficit of 19% of GDP next year.
For comparison, the U.S. hasn’t run a deficit that large since World War II. Even during the worst of the 2008 financial crisis, the U.S. deficit never got higher than 9.8% of GDP.
• These huge deficits are a disaster for Saudi Arabia…
In its Middle East Economic Outlook Report, the IMF says Saudi Arabia could run out of money by 2020.
Saudi Arabia has built up a huge pile of savings from selling oil. It currently holds almost $650 billion in foreign reserves. However, the Saudi Arabian Monetary Agency has already spent $70 billion to make up for the drop in oil revenue. The nation’s foreign reserves hit a three-year low in September…and they’re likely to keep falling.
Saudi Arabia may even have to borrow money in the global bond market for the first time ever. Yesterday, Financial Times reported:
Saudi officials say the kingdom could increase debt levels to as much as 50 percent of gross domestic product within five years, up from a forecasted 6.7 per cent this year and 17.3 per cent in 2016.
• However, Saudi Arabia says it won’t stop pumping oil…
On Monday, Financial Times reported that Saudi Arabia’s state-owned oil company, Saudi Aramco, won’t stop pumping oil while prices are low. Instead, it will keep pumping oil to maintain its share of the global oil market. Unlike some countries, Saudi Arabia has oil projects that can still make money at low prices.
Another Middle Eastern country, the United Arab Emirates (UAE), also doesn’t plan to cut production while oil prices are down. Yesterday, the UAE said it will not abandon efforts to expand its oil production capacity. UAE is the world’s sixth-largest oil producer. Oil makes up 47% of its exports.
The country plans to increase its capacity from 2.9 million barrels-per-day (bpd) to 3.5 million bpd over the next two or three years. Like Saudi Arabia, UAE refuses to dial back production for fear of losing market share.
Saudi Arabia and UAE are key members of the Organization of the Petroleum Exporting Countries (OPEC), a cartel of twelve oil-producing countries. On December 4, OPEC will meet in Vienna to discuss how much oil its members will produce going forward.
It’s a bad sign for oil prices that two key members have promised to not cut production…
• E.B. Tucker, editor of The Casey Report, thinks these oil-rich countries have no choice but to keep pumping…
Oil is the foundation of the entire Gulf region. It would be economic suicide for these countries to cut production.
Giant state-run oil companies continue to pump because oil is about the only thing these countries produce. This is why global oil production is still near record highs even though the price of oil has been cut in half. Many oil-rich countries have actually increased production.
Global oil output reached the highest level in at least 25 years in 2014, according to the U.S. Energy Information Administration.
Global oil supplies remain near record highs despite the huge drop in the price of oil. Russia, the world’s third-largest oil producer, has actually increased its oil output this year. And oil supplies in the U.S. remain far above five-year averages.
• Moving along, the world’s largest shipping company says the global economy is in worse shape than it looks…
A.P. Møller-Mærsk A/S (AMKAF), also known as Maersk, is the world’s largest container shipping company. It moves about 15% of all the consumer goods shipped around the world. This is why many investors consider it a bellwether for global trade…
Last week, the company reported a 61% drop in profits for the third quarter. It also said it was eliminating 4,000 jobs. The massive layoffs will cut Maersk’s global workforce by 17%. The company also canceled orders for several new ships.
Maersk’s CEO, Nils Smedegaard Andersen, says he had to make the cuts because the global economy is stalling.
We believe that global growth is slowing down…Trade is currently significantly weaker than it normally would be under the growth forecasts we see.
On October 6, the International Monetary Fund lowered its global GDP forecast from 3.3% to 3.1%. The organization also lowered its growth forecast for 2016 from 3.8% to 3.6%. Andersen thinks these new forecasts are still too optimistic.
China, the world’s second-largest economy, grew at its slowest pace since 2009 last quarter.
Meanwhile, Brazil’s currency, the real, has plummeted 32% against the U.S. dollar over the past year. And the country’s stock market has crashed. iShares MSCI Brazil Capped ETF, which tracks 85% of Brazilian stocks, is down 35% this year.
On top of that, South Korea, a country many investors consider a “canary in the coal mine” for the global economy, recently reported a huge decline in exports.
The slowing global economy is a huge problem for Maersk and other shipping companies that move consumer goods. But there’s one segment of the shipping industry that’s booming despite the economic slowdown…
• Oil shipping companies haven’t made this much money in over seven years…
Oil shipping companies move oil from one port to another. These companies make money based on how much oil they move. Their rates are not directly tied to the price of oil.
Right now, the industry is booming because the world is flooded with oil. All that oil has to go somewhere…and it’s the oil shippers’ job to move it from sellers to buyers.
Shipping rates for oil tankers have doubled in the past 18 months. Bloomberg Business reports that rates hit a seven-year high last month.
Day rates for ships delivering Saudi Arabian crude to Japan, a benchmark route, reached $106,381 on Oct. 5, the most since July 2008, data from the Baltic Exchange in London showed. That’s about 10 times more than operators need to cover daily running costs including crew, repairs and insurance, according to estimates from Moore Stephens, an industry consultant.
E.B. Tucker, editor of The Casey Report, thinks oil-shipping rates will stay high as long as there’s a surplus of oil. He also thinks owning an oil shipping company is the best way to profit from the global oil glut.
E.B. recently told readers of The Casey Report about his favorite oil tanker company. The company has one of the largest and newest fleets in the world. It’s also paying a 13% annualized dividend.
You can get in on this investment with us by taking a risk-free trial of The Casey Report. Click here to learn more.
Chart of the Day
Unlike oil shipping rates, dry goods shipping rates haven’t recovered since the financial crisis…
Today’s chart shows the performance of the Baltic Dry Index, or BDI, since 2007. The BDI measures the price of shipping raw materials such as steel, coal, and copper. The index accounts for 23 different shipping routes and four ship sizes.
Many analysts think the BDI is one of the most important economic indicators in the world.
In February, the BDI sunk to its lowest point since 1985. The index rebounded a little in the spring before crashing again over the summer.
Today, the BDI is down 95% from its 2008 high. Meanwhile, the shipping rates for oil tankers recently hit an eight-year high.
Delray Beach, Florida
November 10, 2015
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