The upward momentum of oil prices has returned. In the week ending Sept. 14, the Brent crude price rose to $78.09 per barrel and WTI hit $68.99. The Brent/WTI spread continues to widen significantly. From $5.50 at the end of July and $7.60 at the end of August, it closed at $9 per barrel on Friday. This is mainly attributed to the very low inventories at Cushing, Oklahoma, which are 33.2 million barrels lower than last year’s levels. This has resulted in heavy discounting of the price of WTI at Midland compared to WTI at the US Gulf Coast. The wider Brent/WTI spread is also attributed to concerns about the upcoming sanctions on Iran that will take effect on Nov. 4.
Iranian oil exports have tumbled to nearly 1.7 million barrels per day, the lowest output in more than two years. There is resulting unease that refiners’ demand is exceeding supply. Tightness in the oil market became evident after the price structure for Brent shifted into backwardation after flirting with contango for most of the previous four months, signaling a tightening of the spot market. Backwardation is when the current price of oil is higher than a distant futures contract. It is seen as a sign of higher immediate demand and a lower oil supply.
This week, backwardation strengthened further, with prompt-month prices higher than forward prices. This does not incentivize the stockpiling of crude. Backwardation market structure is a bullish factor that increases prompt trading activities and draws down inventories. That is a real concern when global oil inventories have already declined.
One country is trying to take advantage of the tight oil market. Iran believes that US sanctions will be unable to reduce Iranian oil exports to zero. Its position is that the global oil market is already tight and rival producers cannot make up the shortfall. However, Iran has neglected to consider Saudi Arabia’s spare capacity of 2 million barrels per day. It has also conveniently forgotten that Saudi Arabia substituted most of Iran’s shortfall in oil output during the 2012-2015 sanctions. Iran is behind much of the rumor-mongering in regard to the imminent rise in oil prices. In truth, the market is tight but oil prices are stable in the range of $72 to $78 per barrel. This is a result of Saudi Arabia’s influence in working with OPEC+ for the good of the global economy.
Outages in some OPEC countries are adding to the upward pressure on prices. Though the US Energy Information Administration (EIA) reported that Libyan crude production jumped in August by 290,000 barrels per day, to 950,000 barrels per day, Libya’s oil production has been volatile and unstable. Major outages at several Libyan ports in June created anxiety that helped push up prices. Output fell from around 1 million barrels per day earlier this year to as low as 660,000 in July.
The EIA also reported that Venezuelan production sank to just 1.26 million barrels per day, continuing its freefall as a result of the country’s economic collapse. Such low exports are tragic for a country with some 300 billion barrels of proven reserves. Unfortunately, due to years of underinvestment, there is currently no hope of Venezuela raising production.
In Iraq, the situation is difficult as well. The protests in Basra, where most Iraqi production and export facilities are located, have created tension in such a tight market. As yet, the violence has not affected oil production, which reached 4.55 million barrels per day in July, and exports recently hit a record of 3.59 million barrels per day. It takes nerves of steel to safely navigate such market conditions.
• Faisal Mrza is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalmrza.
“North Riyadh will be the place to be,” declares Selim Chidiac, chief executive officer of L’azurde, Saudi Arabia’s biggest jewelry company and a glitzy reminder that the Kingdom has brands of its own to rival the global icons of the luxury business.
Chidiac was talking of the sudden boom in the Saudi retail business that is seeing malls open at an unprecedented rate. “There are so many new malls going up, like Riyadh Park and others. The prospects for the next 18 months are very exciting and dramatic,” he said.
Most of L’azurde’s shops in the Kingdom are in malls, with only a small number on the street or in souks, so the retail and leisure boom — sparked by the decree to allow women to drive and the re-opening of the Kingdom’s cinemas after a 35-year hiatus — is a direct boost to the L’azurde business.
But that does not mean Chidiac can just sit back and watch the business come rolling in. Despite the retail boom, the underlying economy is still suffering from the aftermath of the period of austerity ushered in by the collapse in oil prices in 2014.
“The consumer background in Saudi Arabia is still challenging. There have been lots of changes in the Kingdom, such as the removal of subsidies and perhaps some geopolitical concerns. But ultimately, what has been happening is very positive for the economy. Raising salaries and empowering women are good developments, and they will pay off in the medium and long term,” Chidiac said.
The influence of the regional macro-economy was shown in L’azurde’s recent financial figures for the second quarter of 2018. A overall rise of 13 percent in revenues masked a decline in Saudi revenues, compensated by a leap in the company’s important Egyptian business.
“Most of the growth came from Egypt. Saudi Arabia was actually 10 percent down, but the comparison is not entirely indicative — the same period last year was very big, boosted by the resumption of government spending and the Ramadan period,” he explained.
Chidiac is full of praise for the strength of the Egyptian division of the business, which has three factories, 12 shops and 1,200 employees. “Egypt has been a great story. We’ve been there for 20 years and it has seldom looked so strong before. Consumer spending is high and the stock market is strong,” he said.
“The government reforms of a couple of years ago and the IMF deal benefited the economy and stabilized the currency, which has made our exports easier. Better security enabled tourism again, and also helped attract foreign direct investment. There is now a growing middle class in the country with greater spending power,” he added.
The situation in Saudi Arabia is more complicated, but in the long term Chidiac thinks the country is in for a period of expansion.
“Saudi consumers are getting behind the reform program of Mohammed bin Salman, the crown prince. The economic situation is improving. For a while people have been going into shops to look around and ask about products, but slowly they are beginning to spend too.
“The empowerment of women is beginning to be felt. They are more mobile, and actively seeking jobs now. It is too early to judge the impact of allowing women to drive. It is only a few months now since the ban was lifted. But long term it has to be a good thing for the consumer economy,” he said.
The jewelry tastes of Saudi women — overwhelmingly L’azurde’s target customer — are changing subtly. The move is towards more affordable everyday pieces, such as the “Dream collection” — designed by Al-Anoud Badr, the founder of the fashion brand Lady Fozaza — which aimed to have a trendy edge.
“The Dream collection is our most popular line at the moment. They are the fastest-selling items for daily wear, ranging in price from 1,500 ($400) to 5,000 riyals,” Chidiac said.
More traditional lines are still a big feature, however. “Still our bestselling and most profitable pieces are wedding sets — complete ranges of necklaces, pendants, earrings rings. We had a very good Ramadan for these items. These can range from 15,000 to 100,000 riyals, but we’ve sold customized sets for as much as 1 million riyals,” he said.
The global trend toward more affordable everyday jewelry was the spur for the purchase of the Tous chain of jewelry stores, the most significant corporate development at L’azurde since the 2016 initial public offering (IPO).
“With Tous, we are entering the segment of affordable jewelry for the first time — the market for purchases of less than 2,000 riyals. This is the fastest-growing sector in the world at the moment. Women want smaller pieces for daily wear, and they want to change them more frequently. Tous is the leading affordable jewelry brand in Saudi Arabia, with 22 shops and 90 employees in the Kingdom, and we have bought a 10-year Saudi franchise,” Chidiac said.
There was a second motivation for the Tous purchase. Since the IPO, L’azurde shares are about 50 per cent down from the listing price, and Chidiac has been looking for a long time for a deal that might add some momentum to the share price performance.
“The acquisition of Tous was a major event for us. We’ve been working on it for 18 months, ever since the IPO. The analysis and due diligence took more than a year. The logic of going public was to fund organic growth, and then we began to look at ways to grow non-organically.
“That’s why we did the acquisition of Tous — to give some value back to the shareholders. That has been a major concern. We are not considering share buy-backs. I believe the prospects for the Tadawul are pretty good, as long as there are no major external shocks,” he said.
The logic of the Tous deal should be immediately apparent to shareholders, Chidiac explained. “We paid 188 million riyals for a company that has revenues of 18.8 million riyals, so it is immediately earnings enhancing. We paid in part cash and part debt funded. Now we must consolidate it and grow it, while looking for other opportunities,” he said.
“Tous helps move L’azurde towards being a multi-brand company. We will add more brands, soon, but we should walk before we can run,” he added.
Those other opportunities include opening new stores in Saudi Arabia and Egypt, and perhaps more acquisitions. But there are always challenges in a business as fast moving as jewelry, where taste and fashion can quickly affect demand for the latest goods.
“Customers are becoming very savvy with their spending, looking for discounts and promotions. They are becoming very aware of their choice options. The most common thing we hear from a customer walking into a shop is “what’s new?”. It means we have to manage our stocks effectively.
“There are also challenges with employees — hiring, training and employment conditions. But that has always been the case,” Chidiac said. Most of the 700 employees at the Riyadh factory are Asian, he said, because “Asians have better technical skills in jewelry.”
And, as ever, the geopolitics of the region weighs over business decisions. L’azurde had an operation in Doha that was closed as soon as the confrontation began last summer over allegations of terrorism. Another possible acquisition deal in the UAE was stymied because of Qatari links, he said, without wanting to identify the target company.
Global economic factors also affect L’azurde’s business decisions. The gold price is not a major factor, because the company does not hold stocks of gold beyond its immediate need for manufacturing in Saudi Arabia and Egypt, but it can affect demand.
“It does affect customer sentiment when they see the gold price falling and they see the opportunity for a bargain. The dollar level and interest rates are bigger concerns for the economy and for our business,” he said.