Saudi Arabia’s oil stock gambit

It's the basic successful investment rule: buy when everyone is selling and sell when everyone is buying. The rule has been proved right by many a legendary figure in the investment world. Now that they've crashed energy markets the world over, it's the turn of OPEC's sovereign funds to go on a bargain hunt.  But can they all afford it? As Oil Price writes, earlier this month, the Wall Street Journal reported that Saudi Arabia's sovereign wealth fund—the Public Investment Fund—had been buying stocks in European oil majors, including Shell, Eni, Equinor, and Repsol, with the total price paid for all four stakes seen at $1 billion. The fund, interestingly enough, was supposed to be the primary investment vehicle on Saudi Arabia's journey to economic diversification away from oil.

In all fairness, the fund has also bought a stake in cruise operator Carnival and became a partner in the group that bought English soccer club Newcastle for $375 million (300 million pounds). And it seems the buying spree is far from over.

"The Saudis have been buying every day almost for the past few weeks, especially since the share prices of many of these [oil] companies were in correction territory and dividend yields were very high," one unnamed source in the know told Reuters.

Importantly, the source added that "They've been buying on the basis that everything is much cheaper and that they are bullish on the long-term outlook for oil prices."

Saudi Arabia was the country that fired the starting pistol in what everyone came to see as an oil price war between Riyadh and Moscow after the latter refused to join deeper oil production cuts in early March. In the current context of crippled demand, those deeper cuts would have been a drop in the ocean, as Gazprom Neft's CEO put it recently, but at the time, Russia's move sparked Saudi anger, which led to the latter deciding to flood markets with crude. Naturally, oil tanked.

The bullish long-term outlook of the Saudis may have had something—a lot—to do with the new OPEC+ deal that called for much deeper cuts than ever agreed, at 9.7 million. However, the reaction of the market to the deal must have been at least a little disheartening for those in full possession of their powers of observation.

Oil did jump a little after the deal was made public, but it retreated almost immediately. The slide has continued virtually uninterrupted as more forecasts for oil demand flow in, each more pessimistic than the other. They are accompanied by increasingly gloomy outlooks for the global economy, which translates into more bad news for oil. Saudi Arabia may well be making a risky gamble.

"I don't understand why the PIF is doing what they are doing now when their country is going to need every penny," one Middle Eastern banker told the Financial Times. "It very much reminds me of the QIA in its early years. There's a strategy, but they are not adhering to a strategy. They want high visibility but they also want to make money. They want to diversify the economy, but want to be opportunistic."

The Public Investment Fund has some $320 billion in cash to invest. However, it has already made several large commitments, including refineries in Asia and the Vision 2030 flagship tech project, the Neom smart city, alone worth $500 billion. Work on the Neom project, by the way, has stopped amid the COVID-19 crisis.

"There's a high likelihood it fades into nothingness," one Gulf-based economist told Asia Times. Yet the project made headlines this week after Saudi security forces shot a tribal activist who was protesting the construction of the smart city.

The Public Investment Fund is bargain hunting, just like its equivalents across the Gulf. However, they are all smaller countries, and their funds are fatter. Also, Abu Dhabi, Kuwait, and Qatar tend to take a more conservative approach in their investment decisions, the Financial Times notes in a report on the region's investment intentions. 

Saudi Arabia, on the other hand, seems to be acting in a way that is excessively opportunistic. The country's oil breakeven prices of over $80 a barrel have become notorious. It also remains a mirage for now, as the COVID-19 crisis continues with multiple signs showing clearly that it will be worse than the 2014-2016 oil crisis. The world's economy is expected to contract by 3 percent: the worst economic performance since the Great Depression, the IMF said this week.

What would all this mean for Saudi Arabia? It would mean persistently cheap oil and lower revenues. This would mean public spending cuts. It would mean some form of austerity. It might mean even worse things unless the Kingdom has a financial cushion against the worst of the shock. And yet it is currently unraveling this cushion in its bargain hunt. Meanwhile, authority after authority is warning that oil demand will remain subdued for a long time as the world's tanks fill to the brim with unsold crude.