Saudi Arabia’s Crown Prince Mohammed bin Salman is learning the hard way that barrels of oil with nowhere to go are worth approximately zero. Saudi barrels aren’t worth nothing – yet – but they’re getting close.
On Tuesday, the day after U.S. oil prices actually went negative, Brent crude, the international benchmark, fell 25 per cent to US$19 a barrel. A year ago, it was trading at US$70.
In early March, MBS, as the crown prince is known, apparently thought he had figured it all out. He wanted OPEC, which is led by Saudi Arabia, and Russia, an OPEC ally, to cut production to support prices, which were sagging as the novel coronavirus was bursting out of China. Russia said nyet.
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MBS didn’t take Russia’s refusal to play well. He broke Saudi Arabia’s alliance with Russia and vowed to open Saudi Aramco’s spigots, flooding the world with oil. For him, it would be a nice little twofer: Punish Russia and punish the shale-oil industry, whose burgeoning output had transformed the United States into the world’s biggest oil producer and one of its biggest oil exporters.
What could go wrong?
A week later, on March 11, Saudi Arabia signalled that it would dump another 2.3 million barrels a day onto the global market, taking the country’s total output to 12.3 million barrels. Energy analysts were astonished. Olivier Jakob, a former oil trader who is now the managing director of Swiss oil consultancy Petromatrix, called the move highly aggressive, “forcing as much crude as possible in a market that does not want it.”
Indeed. By mid-March, oil was falling fast, and MBS apparently realized that his timing was rather off. So he did a U-turn and convinced OPEC and its allies to cut production by almost 10 million barrels a day. But the cuts would take months to implement, and by then, it would be too late anyway. The COVID-19 crisis had shut down economies around the world. Unsold oil was filling storage tanks and parked supertankers to the brim.
This week, the dire situation reached the point where the cost of storing American oil was higher than the price of oil itself. That’s when prices turned deeply negative. (On Tuesday, West Texas Intermediate rebounded to US$6 a barrel – a price that would still destroy the shale industry within months.)
MBS seems to have lost more than he has gained. Yes, the U.S. shale industry – the business that had the audacity to challenge Saudi Arabia’s dominance of the market – is in deep trouble. U.S. oil-company bankruptcies have started and will continue.
But the Saudi economy is also taking punishing blows. The prospect of oil going back to US$70, even US$50, this year appears slim, as big economies make only tentative steps to dismantle their quarantines. Demand could stay unusually low until a COVID-19 vaccine is developed, which may not happen until sometime next year. Italy gives you a sense of the demand destruction. Figures released Tuesday reveal that March oil sales were 34-per-cent lower than a year ago. Gasoline sales were down 52 per cent, and diesel was down 41 per cent. April’s consumption figures will be even lower, because the Italian quarantine did not start until March 9.
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Saudi Arabia is not facing financial and economic catastrophe, as Italy is. The kingdom has ample foreign currency reserves and a low public debt – its debt-to-GDP ratio is 24 per cent (Italy’s is 135 per cent and rising). Saudi Aramco, the world’s biggest company, has the lowest pumping costs of any oil producer and can endure US$20 oil for some time, though the price could keep falling.
That’s pretty much where the good news ends, because Saudi Arabia itself is a high-cost operation. The extended royal family has some 15,000 members, and a lot of them like their yachts and Ferraris. The country is an undiversified welfare state with a small entrepreneurial class. The upshot is that the government needs oil at about US$80 to balance its budget.
Already, there are signs of stress in the kingdom. Fitch Ratings has placed the top 10 Saudi banks on “rating watch negative.” It did so after oil prices plunged in mid-March (the high rating of the country itself was left stable). The budget deficit is widening fast. The Finance Minister in late March said he expects the deficit to reach 7 per cent to 9 per cent of GDP. But that was when Brent crude was still hovering around US$30. The price has fallen by a third since then, suggesting the deficit could be much higher.
MBS knows that he has to wean Saudi Arabia off its oil dependence. In 2016, he unveiled his Vision 2030 plan to modernize and diversify the economy. The plan would recruit women into the work force, create tech and logistical centres, build new cities along the Red Sea, open the country up to tourism and develop a manufacturing base. But turning the vision into reality would require fortunes; those fortunes would, by definition, have to come from oil production.
Vision 2030 is looking ambitious within the next decade as oil falls out of favour and Saudi Arabia’s financial health deteriorates. The pandemic, of course, propelled prices down at an alarming rate. But MBS’s decision to go to war against Russian and American oil producers last month was badly timed, spectacularly so. Vision 2040 anyone?
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TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
