Saudi Arabia needs high oil prices as Saudi Aramco IPO looms


Saudi Arabia wants to see Saudi Aramco IPO’s worth $2 trillion
IPO is expected to take place later this year, a one-year postponement possible
Al-Falih wants to continue cooperation with other producers  
Russia plans to invest in Saudi Aramco  
Institutions express equivocal forecasts
Nobody should be taken by surprise that OPEC wants to maintain high oil prices as it leads to higher budget income, more investment spending which combined could help keep financial stability when prices go down.

Moreover, there is another reason why the Cartel (Saudi Arabia to be precise) could want to keep high crude prices namely the largest initial public offering in history. There are calculations that Saudi Aramco could be worth up to $2 trillion. The latest remarks coming from Saudi Arabia energy minister suggest that there is still no appropriate time to carry out the IPO. What does it mean? So, one may assume that the country wants to continue shoring up oil prices even at the cost of lower revenue due to curbed output, encouraging other producers to do the same.

In spite of the fact that Saudi Arabia is aware that it’s impossible to stop US shale production it could force US-based drillers to go bankrupt via boosting its own crude output. In this respect one cannot forget that the whole shale industry in the United States relies heavily upon debt and therefore it needs really high crude prices in order to be able to make profit after interest payments.  

Saudi Arabia wants to obtain $100 billion which would imply the stock valuation close to $2 trillion. According to CEO Amin Nasser the company is already ready to carry out the IPO, however it still waits for the final decision from the shareholder - Saudi Arabia. Having said that, there are many pundits pointing that $2 trillion valuation could be hard to achieve therefore the royal family could choose to hold off on conducting the process until 2019.

That said, there is nothing surprising that Saudi Arabia energy minister said during the last meeting in Oman that output cuts should continue till the end of this year with a possibility of a further extension beyond this date. On balance, the continuation of the ongoing strategy could make sense as the oil market seems to be vulnerable to any additional supply flowing into the market. What’s more, it turns out that Russia could stop insiting on the early exit from the agreement as many Russia-based pension funds are expected to invest in the Saudi Aramco IPO. All in all, it could lead to yet more intensified collaboration between the OPEC and Russia.

Finally let’s recall the latest forecasts from the most prominent financial institutions. For instance, Bank of America foretells that a peak in oil demand will be reached in 12 years but growth in demand is anticipated to slow down since 2020. Apart from it, hedge funds still bode well for oil prices seeing the continued rise up to $80 mainly on the back of shrinking inventories. In turn, Barclays points that market participants zoom in solely on current reports playing down expectations with regard to a potential build-up in stocks over the course of the second half of 2018 and 2019. The bank estimates Brent prices could end the year at around $60.

Oil prices are already hovering nearby crucial resistances, however the underlying uptrend has yet to be breached. Having assumed we have a brush with a ABC correction one could count on an increase toward $75. On top of that huge overbought cannot be missed out as well being another reason for cautiousness.