When entering the site and if cookies are prevented from being saved, a message must be displayed
in a popup message box informing the user that their local browser settings are preventing
cookies from being saved and that cookies are required for the site to work. Exact text
to be provided for UAT. On OK click of the message, the user should be redirected to
the global landing page (currently ssga.com).
Saudi Arabia’s decision to launch an oil price challenge against Russia sent markets into panic mode, adding further uncertainty to a world already in the throes of the Covid-19 epidemic. We aim to highlight some of the key implications of this predicament.
Saudi Arabia’s decision to launch an oil price challenge against Russia sent markets into panic mode. This adds a third layer of uncertainty on top of the existing two – Covid-19 viral trajectory and future policy responses – in all affected economies. Worse, for investors there are fewer data points and less public information from which to forecast Saudi Arabian (or Russian) oil policy. This note aims to highlight some of the key implications of these issues:
1. The Saudi action does not merely imply ramping up of production, with an estimated spare capacity of just under two million barrels per day (mbd). Saudi Aramco also announced total supply targets, which include emptying some of its global inventories. Other Gulf countries are expected to use their spare capacity as well, so together with Russia’s marginal increase, the world could be faced with over 3mbd of extra supply starting April. This should put continued downward pressure on oil prices, particularly as many key economies will be experiencing peak Covid-19 demand damage at the same time.
2. Figure 1 illustrates that future Saudi output will likely rise above 12mbd, making it the world’s second largest oil producer for the first time since the tentative OPEC+ arrangements of late 2016. The Saudi objective here is primarily to induce the Russians to return to the negotiating table and revive OPEC+ in earnest. This is a major gamble, given that Russia’s fiscal position (comparatively lower fiscal break-even price – required to meet an oil-dependent country’s spending needs – and a floating exchange rate that cushion the oil price decline) is in better shape than Saudi Arabia’s. Nonetheless, both oil producers share an interest in limiting the extent of such a price war, particularly as the Russians cannot offset the lower oil price with greater market share.
3. Could these events also be an intentional challenge to US shale? Unlikely, at least from Saudi Arabia’s perspective given the experience of 2014-2016, when oil prices had similarly collapsed. Not only markets but also astute oil observers were caught off guard by the fallout. It stands to reason that Russia presumed it could carry on the trend of the past few years (Figure 1) in which nearly all production cuts were absorbed by Saudi Arabia. Riyadh now has put Moscow on the spot, though Russia clearly hopes to affect US producers, too. The oil price drop is paired with an extreme reversal of financial conditions. In our view, US production may fall over the coming months, pressuring leveraged shale producers, but in the medium term it should revert to trend. We point toward oil prices required for shale profitability, which tend to be lower than the fiscal break-even oil price of either Russia or Saudi Arabia (roughly US$42 and US$75, respectively).
4. The larger US challenge is how to weather the oil industry downturn this year. Figure 2 shows how closely correlated US manufacturing industry optimism is to oil prices. Manufacturing was barely exiting the 2019 trade war when Covid-19 struck. The loss of oil industry demand will bring additional pain to US manufacturers. Given that they are disproportionately located in US swing states, the political effect will be magnified. In our view, US President Donald Trump will be very eager to offset that dynamic and may therefore consider more experimental policy actions.
In addition to uncertainty around the virus epidemic and ongoing policy responses, markets may now need to cope with political risks, too. This could contribute to high volatility across asset classes until the epidemic’s peak is forecastable for market participants. In addition, there is considerable potential for market rallies on the back of policy surprises as governments react to worsening economic conditions. Specific to oil, a Saudi-Russian rapprochement remains the likeliest outcome, though that could take a few months. Also, we do not expect a symmetrical oil price recovery but only a partial improvement in the face of incremental return of global demand.
Abu Dhabi: State Street Global Advisors Limited, Middle East Branch, 42801, 28, Al Khatem Tower, Abu Dhabi Global Market Square, Al Maryah Island, Abu Dhabi, United Arab Emirates. Regulated by ADGM Financial Services Regulatory Authority. T: +971 2 245 9000. Australia: State Street Global Advisors, Australia Services Limited (ABN 16 108 671 441) (AFSL Number 274900) (“SSGA, ASL”). Registered office: Level 15, 420 George Street, Sydney, NSW 2000, Australia. T: 612 9240- 7600. F: 612 9240-7611. Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 120, 1000 Brussels, Belgium. T: 32 2 663 2036. F: 32 2 672 2077. SSGA Belgium is a branch office of State Street Global Advisors Ireland Limited. State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Canada: State Street Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Quebec, H3A 3A8, T: +514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900. Dubai: State Street Global Advisors Limited, DIFC Branch, Central Park Towers, Suite 15-38 (15th floor), P.O Box 26838, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. Regulated by the Dubai Financial Services Authority (DFSA). T: +971 (0)4- 4372800. F: +971 (0)4-4372818. France: State Street Global Advisors Ireland Limited, Paris branch is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Paris Branch, is registered in France with company number RCS Nanterre 832 734 602 and whose office is at Immeuble Défense Plaza, 23-25 rue DelarivièreLefoullon, 92064 Paris La Défense Cedex, France. T: (+33) 1 44 45 40 00. F: (+33) 1 44 45 41 92. Germany: State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”). Registered with the Register of Commerce Munich HRB 121381. T: +49 (0)89-55878-400. F: +49 (0)89-55878-440. Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors Ireland Limited, Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Milan Branch (Sede Secondaria di Milano), is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960 and whose office is at Via Ferrante Aporti, 10 - 20125 Milano, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380 Financial Instruments Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan Investment Advisers Association, The Investment Trust Association, Japan, Japan Securities Dealers’ Association. Netherlands: State Street Global Advisors Netherlands, Apollo Building, 7th floor Herikerbergweg 29 1101 CN Amsterdam, Netherlands. T: 31 20 7181701. SSGA Netherlands is a branch office of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F: +41 (0)44 245 70 16. United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. United States: State Street Global Advisors, One Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000. South Africa: SSGA is a Licensed Financial Services Provider authorised by the South African Financial Services Board in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. State Street is required to have a complaints process and complaints can be directed to SA-RiskandCompliance@statestreet.com. Any complaints that cannot be satisfactorily resolved by the provider may be referred to the Office of the Ombud for Financial Services Providers in accordance with section 26 of the Act read with the applicable provisions of the Rules on Proceedings of the Office of the Ombud for Financial Services Providers in Board Notice 81 of 2003.
Investing involves risk including the risk of loss of principal. The views expressed in this material are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements.
Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This information should not be considered a recommendation to invest in a particular sector or to buy or sell any assets shown. It is not known whether the sectors or assets shown will be profitable in the future. The holdings are taken from the accounting records of SSGA which may differ from the official books and records of the custodian.
EMEA: The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.