What’s Going On Here?Saudi Aramco – the biggest company in the world – saw its first-quarter profit drop 25% on Tuesday, as the one-two punch of collapsing oil prices and falling demand battered the Saudi oil giant’s sales. What Does This Mean?Aramco’s first-quarter earnings came in below expectations, but the worst may be yet to come. It was only in April, after all, that oil prices hit a 34-year low, suggesting the impact will probably be even more pronounced next quarter. And that may be why Aramco’s decided to slash its 2020 spending by 25% (tweet this).
Fortunately for Saudi Arabia, the oil giant didn’t do the same to its dividend. The Kingdom – which owns around 98% of Aramco – relies heavily on those payouts to cover its spending. So if they vanish – and the oil price collapse continues to wreak havoc on the country’s finances – the austerity measures announced on Monday could be just the beginning… Why Should I Care?For markets: Parental supervision.
Big Oil’s generous dividends have long been a key attraction for investors, but they’re increasingly under threat. Exxon Mobil, for one, recently froze its payouts, while Royal Dutch Shell’s were slashed by two-thirds. So investors might simply be relieved Aramco held its ground. Then again, other oil majors aren’t under their governments’ thumbs like Aramco is: Saudi Arabia told the state-owned company to pump at maximum capacity in March, only to insist it cuts production by more than 40% two months later.
The bigger picture: No way, Norway.
It’s not just Saudi Arabia feeling the heat: Norway, western Europe’s largest oil exporter, is facing its worst economic slump since World War II due to the collapse in oil price and demand. The country revealed on Tuesday that it’s withdrawing a record $37 billion from its gigantic investment fund. That would in turn force the fund – the biggest in the world – to sell a significant chunk of its bond holdings, which could add pressure to global bond markets. | 