Saudi Downgrade and China PMI
Oil prices are selling off after a subpar manufacturing number out of China and reports that Saudi oil production hit a post-soviet high. Not even a downgrade of Saudi Arabia’s debt market seems to be enough to get the market to believe that an OPEC production cut is in the cards and so the production war continues. A big drop in the U.S. oil rig count isn't enough to support oil as the market frets about weak demand against a backdrop of rising Russian output. The mood starts bleak to this week, but we may recover later if we begin to focus on some of the more bullish issues.
Low oil prices and the inability of Saudi Arabia to make enough cuts to its budget has caused rating agency S&P to cut its rating of Saudi Arabia's long-term foreign debt and local currency ratings by one notch to 'A-plus/A-1', with a continuing a negative outlook. S&P said, "pronounced negative swing" in Saudi Arabia's fiscal balance prompted the downgrade. S&P said that Saudi Arabia's budget surpluses - or money available after all government expenses had been met - averaged about 13% of GDP. This situation, however, has changed rapidly as the price of oil has crashed and in 2015 Saudi Arabia is expected to see a budget deficit equal to 16% of GDP. The downgrade will put further pressure on Saudi Arabia to work on cutting production.
What will make that harder is Russian oil production hit a post-Soviet high in October rising 0.4 percent month on month to 10.78 million barrels per day (bpd). The Russians apparently are all in when it comes to maintaining market share, making a production cut a bit more difficult. Russian output hit 45.572 million tons versus 43.961 million in September, or 10.74 million bpd, which was at that time a post-Soviet high.
The U.S. rig rout continues. Friday, Baker Hughes (N:BHI) reported that the U.S. oil rig count plummeted by 16 rigs. So much for the rig count stabilizing. That is the ninth week of declines. There are now 64% fewer rigs from a peak of 1,609 in October 2014.
Gas rigs, on the other hand, rose by four to 197 and the offshore rig count was 33 last week, down two and down 20 from a year ago. For all rigs, including natural gas, the week’s total fell by 12 to 775.
But with weak data out of China, the market is losing support. China's official manufacturing purchasing managers index was unchanged at 49.8 in October, marking the third straight month below the 50 mark and raising concerns about demand growth and weighing on prices early.
Yet while we are weak early, with the cut in the Saudi outlook and more cap x and job cuts in the energy space, we want to use the weakness to put on long term bullish strategies!