WEEKLY ENERGY RECAP: Contrasting notes — but the story is the same

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Updated 23 August 2020

WEEKLY ENERGY RECAP: Contrasting notes — but the story is the same

The two international oil benchmarks ended the week on contrasting notes as Brent edged lower after two weeks of gains to $44.35 per barrel. Meanwhile, WTI advanced to $42.34 per barrel.

Still, the broader narrative of downward pressure on prices remained the same and oil remained steadfastly stuck in its current trading range.

The 21st OPEC Joint Ministerial Monitoring Committee (JMMC) meeting ended positively and emphasized the beneficial contribution of OPEC+ in rebalancing the global oil market.

Tellingly, prices did not rise in response the latest demonstration of the group’s continued commitment to output cuts, which perhaps reflects wider concerns about the pace of recovery from the coronavirus pandemic and the danger of a second wave. US crude oil exports to China will hit a record in September.

It coincides with lower refining runs in the US as the market is defined by weakness not only in the shale sector but also across the medium sour crude grades that are produced in the US Gulf coast. 

US refining utilization was 80.9 percent, which is the weakest seasonally adjusted figure in decades, after refiners shut down crude distillation units following the collapse in demand.

Another sign of the weakness in demand is the “contango” market structure which signals concerns about oversupply and describes a situation where the price of oil for future delivery is lower than for the current month.

This encourages storing barrels rather than selling them until prices improve.

This could yet lead to a repeat of the “super-contango” scenario witnessed in April when prices plummeted to historical lows.

Persistent weak demand continues to force refineries to shut down, with margins likely to remain depressed for some time.

Saudi Arabia looks to cut spending in bid to shrink deficit

Updated 01 October 2020

Saudi Arabia looks to cut spending in bid to shrink deficit

  • Saudi Arabia has issued about SR84 billion in sukuk in the year to date

LONDON: Saudi Arabia plans to reduce spending next year by about 7.5 percent to SR990 billion ($263.9 billion) as it seeks to reduce its deficit. This compares to spending of SR1.07 trillion this year, it said in a preliminary budget statement.

The Kingdom anticipates a budget deficit of about 12 percent this year falling to 5.1 percent next year.

Saudi Arabia released data on Wednesday showing that the economy contracted by about 7 percent in the second quarter as regional economies faced the twin blow of the coronavirus pandemic and continued oil price weakness.

The unemployment rate among Saudis increased to 15.4 percent in the second quarter compared with 11.8 percent in the first quarter of the year.

The challenging headwinds facing regional economies is expected to spur activity across debt markets as countries sell bonds to help fund spending.

Saudi Arabia has already issued about SR84 billion in sukuk in the year to date.

“Over the past three years, the government has developed (from scratch) a well-functioning and increasingly deeper domestic sukuk market that has allowed it to tap into growing domestic and international demand for Shariah-compliant fixed income assets,” Moody’s said in a statement on Wednesday. 

“This, in turn, has helped diversify its funding sources compared with what was available during the oil price shock of 2015-16 and ease liquidity pressures amid a more than doubling of government financing needs this year,” the ratings agency added.