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Crucial Saudi Aramco Q2 Earnings Should Draw Oil And Diplomat Attention

The second quarter financial results for Saudi Aramco will be released on August 9 with an investor call to follow on August 10. The world’s highest market capitalization company (unless Apple AAPL overtakes it soon) does not have all that many investors outside of the Persian Gulf region, so the earnings report’s relevance in the equity world is minimal. However, this particular earnings report will be crucial for the oil industry to understand the full impact of the early months of the coronavirus crisis and for geopolitical analysts looking at political stability in Saudi Arabia.

Aramco’s first quarter results showed a drop in profit of 25% even though the price of oil was only low for three of thirteen weeks in the quarter. In April, the first month of the second quarter, Aramco drastically overproduced while simultaneously lowering its official selling prices, especially to Asia. Though the price of oil rose in May and June and Saudi Arabia decreased its production to help stabilize that price, the financials are not expected to impress. As the company with the most production and largest production capacity in the world, Aramco is particularly susceptible to fluctuations in oil price.

Just how difficult the second quarter was for Aramco will be useful for the oil industry, oil traders and scholars of the industry. The coronavirus and resulting economic lockdowns were going to hurt oil demand no matter what, but Saudi Arabia plummeted the price of oil with its unilateral decision in early March to react to noncooperation from Russia by increasing production to unprecedented levels and cutting prices. Oil fell thirty percent almost at once, and then it kept falling. It was a mistake to do this amid a public spat with Russia’s oil ministry, because it panicked the market. If Aramco suffered enough in Q2, then oil watchers and players can have some confidence that current Saudi leadership learned to refrain from making impetuous decisions with its country’s main economic driver.

From a geopolitical perspective, the second quarter Aramco financials must be seen as important to political stability in the kingdom. The oil industry accounts for about half of the country’s GDP and more than 70% of its exports. The industry also provides more than 60% of the government’s revenue, and the government employees more than 70% of working Saudis. A healthy Aramco is vital to the continued operations of the country, especially as it is now facing a severe economic slowdown because of the virus. Already the country has almost entirely cut religious tourism because of the virus, and the government has instituted a 15% VAT to try to recoup some revenue lost from the oil and religious tourism industries. Moreover, 20% of Saudis bought into the Aramco IPO in December when the government pushed participation from retail investors. A weak Aramco equity leads to disgruntled citizens.

Because Aramco equities are so sparsely traded by U.S. funds and individual retailer investors are even prohibited from buying them, the numbers are really irrelevant to the stock investing world or the greater equities market. However, oil people and the State Department should be reading and listening. The financials will be most informative for them.

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