Running out of Cash

Jim Brown
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Several weeks ago, I wrote an article on the cash drain for Saudi Arabia. The kingdom was returning to the bond market to raise $27 billion because of falling oil revenues. Qatar has joined in that hunt for cash.

Saudi Arabia has seen their oil revenue decline by more than 41% even though they are pumping more oil now than in recent memory. They produced 10.45 mbpd in July. Saudi is in the middle of an oil war on prices and now a fighting war in Yemen. They may have to go back to the bond market to raise even more than the planned $27 billion. This was their first time bond sale since 2007.

Fast forward to today and Qatar has issued $4.1 billion in bonds on September 1st because of falling oil revenues. Plenty of investors were eager to loan money to Qatar and the offering was oversubscribed by 400%.

Countries are not the only entities trying to raise cash because of low oil prices. The Middle East economies are declining because oil income produces a lot of spending and investment. Without that income the oil economies are slipping.

Abu Dhabi's First Gulf Bank, the UAE's third largest bank, is trying to raise $1 billion in a syndicated loan over three years. Qatar National Bank completed a $3 billion loan offering earlier this year. Union National Bank is currently trying to raise $750 million.

Deposit growth is slowing and lending is increasing. When oil income shrinks the companies that depend on the oil sector must turn to the banks to raise capital rather than use cash flow. The UAE's 49 banks saw their loan to deposit ratio rise to 100.2% in June, up from 95% in June 2014.

The problem is purely financial. Since oil prices began to crash in late 2014 the amount of petrodollars, that is oil sales in dollars, is declining by -$24 billion a month according to Goldman Sachs. That will cause a shortfall of $860 billion by 2018. That is a lot of pain for those Gulf countries that depend on a steady flow of oil dollars.

This is the first time in 20 years that OPEC nations are sucking up market liquidity rather than adding to it with investments. Foreign reserves held by these countries have sprung a leak. Algeria saw its reserves decline -$11.6 billion in January alone and the biggest decline in 25 years. At its current rate of cash burn the reserves will run dry in 15 months.

Angola saw its reserves decline by -$5.5 billion and the biggest annual decline in 20 years. Nigerian reserves fell by -$2.9 billion in february and the biggest monthly drop since records were started in 2010.

Saudi Arabia saw foreign reserves decline by -$20.2 billion in February. That was the biggest monthly drop in 15 years and twice the rate of decline during the financial crisis.

OPEC countries are expected to receive $380 billion for oil sales in 2015. That is a decline of -$350 billion from 2014 and the largest one-year decline in history. BNP Paribas said oil rich countries will sell more than $200 billion in assets in 2015 to help cover the shortfall.

Oil exporting countries have recycled their dollars in prior years by investing in global equity markets, treasuries, real estate and businesses. Deutsche Bank said the drop in income has caused a surge in liquidation of those assets starting with the low yielding European debt. However, that has started to take a toll on U.S. treasuries as they repatriate that money to pay their bills.

The IMF has warned that the repatriation of petrodollars is a significant impact to the global economy. Removing the equivalent of their $350 billion in lost annual income from the markets is enough to reverse market sentiment.

Sovereign wealth funds from oil producing countries have also been reallocating their investments and liquidating some assets to raise cash.

Oil prices are below the fiscal breakeven point for most oil exporters. If it takes $75 oil to fund the government's budget then $50 oil is a major problem. That is especially true since prices are expected to remain low for a long time.

We are seeing the same thing with China. In recent weeks, they have been selling U.S. treasuries to raise money to support their stock market and to provide additional stimulus to their economy. In 2014 they owned $1.4 trillion in treasuries. We will not know the severity of the damage for several months but that total could have been decreased significantly.

The global equity markets have been showing the impact of the petrodollar liquidation trade. Several analysts have blamed the U.S. market decline on liquidation by sovereign wealth funds. Nine of the top ten sovereign wealth funds are owned by oil exporting nations. They need to raise cash quickly and liquidating investments is quicker and less painful than selling billions of dollars in debt to finance your negative cash flow.

Since the 2014 highs in oil prices, energy companies have laid off more than 120,000 workers and reduced spending by more than $114 billion. In addition they have cancelled or delayed more than $200 billion in new projects according to Wood Mackenzie Ltd.

Conoco was the latest to warn last week that they were cutting another 10% of their workforce or 1,810 workers in addition to the 1,000 laid off earlier in the year. They said the reason for the cuts was their forecast for lower oil prices for a longer period.

It may not be the right time to go bottom fishing in energy stocks. There are some bargains available but with forecasts for oil to return to the $30s we may get a chance to buy them even lower.

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Active Rigs

Active drilling rigs declined -13 to 864 for the week ended on Friday. Oil rigs fell -13 for the week to 662. Active gas rigs were unchanged at 202 and an 18-year low. Active rigs have now declined -1,067 since the high of 1,931 in September. That is a -59% drop. Active offshore rigs rose +3 to 33 and down -33 from year ago levels.

Oil Inventories

Crude inventories rose +4.7 million barrels to 455.4 million.

Refinery utilization declined from 94.5% to 92.8%. That is down from the high of 96.1% on August 7th.

U.S. production declined -119,000 barrels to 9.218 mbpd, down from the 9.61 mbpd and 40-year high in June. Demand fell -269,000 bpd.

Cushing inventories fell slightly to 57.3 million.

Gasoline inventories declined -0.3 million barrels to 214.2 million. Gasoline demand rose +249,000 bpd going into the Labor Day weekend.

Distillate inventories rose +0.1 million barrels to 150.0 million and a three-month high. Demand rose +160,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.