— This is the script of CNBC's news report for China's CCTV on May 13, 2020, Wednesday.
Saudi Arabia's latest decision to cut output took the market by surprise at the start. In particular, OPEC + was set to meet on June 10th to discuss further cuts. But Tuesday's update from Saudi Aramco, the state oil company, further rationalizes that decision.
The company's overall performance fell short of market expectations after a 25 per cent drop in first-quarter profits. The collapse in oil prices has hurt not only Saudi oil company profits but also Saudi government revenues. Saudi revenues fell by 22 per cent in the first quarter compared with the same period last year, leaving the government with a deficit of more than $9bn. The 2020 government budget plan formulated by the Saudi Congress predicts that this year's initial deficit will be US $ 50 billion, accounting for 6.4% of GDP. This plan is based on an oil price of $ 60 per barrel.
Obviously, under the impact of the epidemic, the international oil price has been significantly lower than this level, less than half of the target price. If nothing is done, Saudi Arabia's government debt problem will get worse and it will have to borrow more. Saudi Arabia's finance minister also said recently that this state is facing an unprecedented crisis. Saudi Arabia recently announced a number of budget cuts in response to its fiscal crisis.
These include the suspension of cost-of-living allowances for government civilian and military personnel from June 1. The measures will cut spending by about $26.6 billion, or 10 percent of the state's budget for the full year. Saudi Arabia is also seeking to raise revenue, raising its value-added tax from10% to 15% from July 1.
Beyond that, another big priority is to try to stabilise and raise prices, including further cuts in output.
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They do need price to come up at a more constructed place, in the hope that they can get fiscal position in a better shape
As the leader of OPEC and OPEC +, Saudi Arabia's output cut has some driving effect. The United Arab Emirates and Kuwait also announced further production cuts, totalling 180,000 barrels a day.
To some extent, the oil-rich countries' cutbacks act as accelerators, injecting further momentum into the recent rally in oil prices. These additional cuts, on top of previously announced cuts, will help to further reduce the huge pressure on inventories, and we are seeing some boost in international oil prices, but only to a limited extent. The main reason is that there is still great uncertainty on the demand side under the epidemic.
There will be still lingering concerns about demand, we have a long way back , to get this market back into balance, we really have to wait to see what is gonna happen with this virus, because we can basically see, or in the clear in terms of being on a sustainable path to recovery.
Under this scenario, the US shale companies with higher costs will also continue to be under pressure. Chesapeake Energy Co., one of the leaders of the U.S. shale oil industry, is reportedly considering bankruptcy to restructure about $9 billion in debt, according to a regulatory filing Monday. The company lost more than $8 billion in the first quarter. Five shale oil companies have filed for bankruptcy or bankruptcy in the past month. Over the past three quarters, 31 U.S. oil and gas companies have gone bankrupt, according to industry figures. U.S. President Donald Trump on Tuesday praised rising oil prices and said U.S. energy companies are getting better. But for the market, there is still a question mark. How will U.S. energy companies respond to further Saudi production cuts?
We will keep an eye on this issue.