Only $60 Oil Can Save The Aramco IPO

July 6, 2017: Only $60 Oil Can Save The Aramco IPO


The OPEC deal is in crisis. All oil price gains derived from the 1.2 million-barrel cut’s initial announcement and implementation have been wiped out, and No. 1 OPEC producer Saudi Arabia’s attempt to draw down American inventories has fallen flat, due in part to insubordination from the No. 2 producer, Iraq, along with upticks in production from Nigeria, Libya, and U.S. shale.

The KSA had a clear opportunity to drastically change the direction of oil prices last month, when the Organization of Petroleum Exporting Countries (OPEC) met in Vienna to discuss the duration and scope of the output cut extension. Though Riyadh agreed to continue the deal three months longer than analysts expected (the new deal ends in March 2018, as opposed to December 2017 as many expected), the bloc leader did not heed recommendations to deepen the cuts, keeping production at 32.5 million bpd.

In addition, Nigeria and Libya got a pass that allows them to produce as much as they can for the next nine months, despite the African duo’s booming recovery worth hundreds of thousands of barrels.

In April and May, Saudi Arabia cut exports despite the fact that the OPEC deal does not limit export volumes. But new ClipperData says that June numbers could reveal a reversal in that downward trend, as KSA appears ready to ship more oil.

The royal family – especially newly crowned heir to the throne Mohammed bin Salman – needs oil prices near $60 for Saudi Aramco’s 2018 IPO to generate the income it needs. At the time of this article’s writing, Brent was trading up at $47.78.

One month after OPEC’s failure to toughen production quotas, the bloc remains uncertain about deeper cuts. Reuters reported on Tuesday that the monitoring committee for the deal, plus Saudi Arabia and Russia, would officially discuss the deal’s progress next at the end of July. That’s an extra two months of market standstill.

The IPO isn’t moving along as quickly as originally planned. Riyadh’s financial planners are behind in preparing Aramco and world markets for what is expected to be the largest IPO in history. The team was supposed to reach a decision on a foreign bourse for the listing by the end of Ramadan, but Eid-ul-Fitr passed days ago, and the victor has yet to be named—just murmurs that Bin Salman is at odds with top planners who prefer London over New York.

And while the Saudis may not be deliberately procrastinating on the listing, holding out for higher oil prices, the current low oil prices certainly aren’t rushing things along.

Realistically, no stock exchange other than New York or London had a fair chance at winning the Aramco listing. The United Kingdom had presented plans to bend its listing rules to accommodate the state oil company on more favorable terms, but British fund managers find the obvious kowtowing to Saudi oil wealth to be obscene. New York would connect Riyadh to the steepest pool of international funds, but an ongoing class action lawsuit against Saudi Arabia pursuant to the controversial Justice Against State Sponsors of Terrorism Act could expose Aramco and its liquid assets to litigation.

And there’s no doubt that Riyadh desperately needs the liquid. The $100-$400 billion it hopes to raise from the IPO is earmarked for a much-needed economic overhaul, bringing Saudi Arabia into the 21st century—without the oil dependency—by 2030. The KSA has the most to lose if investors do not get excited to buy small pieces of 5 percent of its most valuable company.

With some claiming that peak oil is expected to hit around 2030, Aramco shareholders would have just 12 years to profit from their investment before it loses most of its value—or even all of its value. And that’s assuming the Aramco listing goes live early next year, as promised. Riyadh has yet to pick a venue, and the rest of the planning process has been shrouded in secrecy. Who knows how close they are to finalizing a valuation or determining exactly what assets will be included in the IPO-version of Aramco?

A wrong decision on any of the above factors could be the straw that breaks the camel’s back for investors and hedge fund managers who have taken their most bearish position on oil futures markets since the price crash in 2014. As the world’s largest oil exporter, its tick tock on the clock for Saudi Arabia to make a big change in oil market fundamentals, and doing “whatever it takes” as Saudi Arabia has vowed to do, may be much more important—and much more painful—that it had imagined.

By Zainab Calcuttawala for