Analysts fail to share the blind optimism of Saudi Aramco’s chief

Despite suffering a massive collapse in profits for the second quarter of 2020, the boss of energy titan Saudi Aramco struck an optimistic note in a call with reporters yesterday afternoon.

“Look at China,” Amin Nasser, chief executive, said, “their gasoline and diesel demand is almost at pre-Covid 19 levels. We are seeing that Asia is picking up and other markets. As countries ease the lockdown, we expect the demand to rise,” he added.

His comments came as it reported a drop of more than 73pc in its profits for the three months to June 30, its worst set of results since its long-awaited stock market listing last year, and reflecting a period of unprecedented turmoil for energy markets.

Oil companies around the world are struggling to cope with a collapse in prices after the pandemic brought normal life to a crashing halt. Brent crude dropped as low as $19 a barrel from almost $70 at the start of the year, while the US benchmark oil price briefly went negative in a historic plunge as the crisis took hold.

And while it is true that there has been a solid two months of optimism in oil markets, with prices rebounding as lockdown measures in Europe and Asia have been slowly lifted, many analysts now warn that any recovery is likely to be extremely bumpy, and marred by new outbreaks of the virus.

Despite Aramco banking on oil prices steadily increasing as lockdowns are lifted, a mild second wave of Covid-19 is now Rystad Energy’s base case scenario for oil demand this year. Because of the optimism felt by some in the industry about recovering oil demand, “an unexpected dip of any magnitude will send the oil price into a tailspin, whether swift and sharp, or long and painful”, the energy consultancy says.

“The worst is likely behind us,” Nasser said on the conference call about Aramco’s financial results. “We remain fairly positive about the long term demand for oil.”

But a growing chorus of analysts are warning that this optimism may be misplaced. In June, Goldman Sachs said that another drop in oil prices might be on the horizon, as more than one billion barrels of unused oil still remain on the market. “With oil now above $40 per barrel, supplies will be incentivised to return, but we believe the risks to the downside have increased substantially and are now looking for a 15pc-20pc correction,” Jeffrey Currie, a Goldman Sachs analyst, said at the time.

As the virus rages across South America, India, and the US many of the key drivers of oil demand, including international travel, remain muted. The International Air Transport Association has predicted global passenger numbers this year will decline by 55pc compared to 2019.

Meanwhile, industrial activity in key markets such as Germany and the US has seen sharp falls so far this year. “The deeper economic recession that we now expect in 2020 in all major advanced economies and the drastic reduction in travel in particular have reduced demand for oil products beyond our previous assumptions,” said Alexander Perjessy, a Moody’s vice president and senior analyst.

Aramco’s balance sheet remains strong, however, despite being assaulted by the downturn, which has had a disproportionate impact on the oil market. Analysts say the company has a much better cashflow than rivals such as BP and ExxonMobil, while its gearing – net debt as a percentage of total capital – was minus 4.9pc last month.

In comparison BP reported gearing levels last month of 36pc. But even by Aramco’s own measures, the market is not looking healthy. The company announced in early August that it would delay the release of its official selling prices (OSPs) by a week.

These prices determine how much Aramco charges for the millions of barrels it sells every day around the world, and are seen as an indication of the company’s outlook on oil demand.

“We wouldn’t like to speculate too much right now about what’s behind Saudi Aramco’s delay, but the move could potentially mean lowering the OSPs even more than consensus expects,” said Bjornar Tonhaugen, head of oil markets at Rystad. “If that happens, deeper pricing cuts could prove to be a bearish indicator,” he said.

Whether Nasser truly believes that oil prices are likely to continue to pick up for the remainder of this year, we will find out soon, according to Tonhaugen. “Patience is key now. August is expected to undoubtedly be a month of market volatility.”