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5 Reasons Oil Traders Should Ignore Aramco's IPO Plans...For Now

By Investing.com (Ellen R. Wald, Ph.D.)CommoditiesMar 21, 2018 06:01AM ET
www.investing.com/analysis/5-reasons-oil-traders-should-ignore-aramcos-ipo-plansfor-now-200299548
5 Reasons Oil Traders Should Ignore Aramco's IPO Plans...For Now
By Investing.com (Ellen R. Wald, Ph.D.)   |  Mar 21, 2018 06:01AM ET
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This week brought new reports that the Aramco IPO may not happen at all. Or that if the IPO happens it will be delayed until 2019. Or that after the IPO, shares will only be listed on the local Saudi exchange, Tadawul.

These new reports come despite discussions earlier this month about listing Aramco on the London Stock Exchange. Those talks were held in London between officials there and Saudi officials including Crown Prince Mohammad bin Salman and oil minister Khalid al-Falih. The new reports also come despite a rumored preference by the crown prince to list on the New York Stock Exchange as he begins his visit to the United States this week.

This is the 3rd or 4th time that the media has gone back and forth on whether this IPO will happen, where Aramco will be listed and when it might happen. Last fall, the media reported that the IPO would be replaced with a private sale—around the same time I was in Dhahran talking to Aramco executives who seemed sure a public offering would happen.

Then, in January, when Aramco announced a new business charter, the media switched its tone and reported that Aramco was clearly moving toward its IPO. In mid-February, the media reported that the IPO faced significant hurdles, but then at the end of that month reports stated that Saudi Arabia was actively seeking to list in New York.

In truth, perhaps no one really knows when, where, or even if an IPO will happen—not even Aramco executives and maybe not even the king and his son.

Perhaps the real reason the Aramco IPO garners so much speculation is that some observers think that Saudi Arabia will intentionally raise the price of oil before an IPO to increase Aramco’s valuation. Here are 5 reasons that oil traders should not worry about Aramco IPO plans just now.

1. Saudi Arabia is committed to the current OPEC / Non-OPEC deal. The production cuts from that deal are not severe enough to raise oil prices significantly more than they already are. The current quotas are not the types of price hikes IPO watchers have been thinking about.

2. Saudi Arabia does not have the ability to raise the price of oil on its own in the current market. In the 1980s Saudi Arabia tried to raise the price of oil by cutting its own production, but the policy was not successful because there were too many other producers in the market. Today, there are several non-OPEC producers with spare capacity who would make up the missing supply if Saudi Arabia decreased its own production.

3. In today’s market, oil prices are too volatile for Saudi Arabia to try a tactic like this so far ahead of an IPO. If Saudi Arabia does intend to spike the price of oil before a public listing, it would be closer to the actual listing time.

4. Traditionally Saudi Arabia has considered stable oil prices more valuable than short-term price spikes. It has sought production policies that try to stabilize the market and has looked for an equilibrium that it believes is good for both consumers and producers, because very high oil prices can lead to economic shock and decreased future consumption. Of course, new leadership in Saudi Arabia might have different views on this.

5. Aramco has long-term contracts and relationships with customers around the world. If Saudi Arabia cuts production suddenly and drastically to spike oil prices, the company might have trouble filling those supply agreements.

5 Reasons Oil Traders Should Ignore Aramco's IPO Plans...For Now
 

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5 Reasons Oil Traders Should Ignore Aramco's IPO Plans...For Now

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Carlo Vitro
Carlo Vitro Apr 20, 2018 8:10AM ET
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It's a state own company....would they follow exchanges strick rules if accounting...too big ....and Saudi Arabia still have the majority of the stock....would they respect minority share holders
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Denzel Heden
Denzel Heden Mar 21, 2018 8:17AM ET
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Saudi Arabia alone decides to cut the output of Oil to spark the price of Oil so that the Aramco valuation go up it will be a mad idea. ...not bad idea, it will be a mad idea
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Jason Farber
Jason Farber Mar 21, 2018 7:36AM ET
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Good Morning Ellen,  In the last 4 years we have seen oil at $110 , $30, and now $60 The oil keeps pumping out of the ground...no unusual changes in pumping costs or demand.   Supply is definately higher than before with fracking. This is one thing only - a manipulated market, news driven and totally fake. It is also constantly in flux and therefore there is opportunity to make money , and to lose substantial amounts.
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Fahad Beijing
Fahad Beijing Mar 21, 2018 7:22AM ET
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Disagree .. I worked as part of other Middle East company in Chiba from 2005 to 2012 .. when Price dropped from 120 to 40 .. Aramco announced its own cut. Chinese company were crying for oil in market price want back up to 80 in less then two month .. then stop at 60
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Timochin Khan
Timochin Khan Mar 21, 2018 3:03AM ET
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Excellent... Thanks Ellen...
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