The Saudi King kicked off a month-long tour of Asia this week, as the oil kingdom looks to bolster ties in the east as it loses confidence in the U.S. as a stable ally.
The trip began in Malaysia where King Salman inked a $7 billion deal, promising to invest in a Malaysian petrochemical complex run by state-owned oil company Petronas. From there, he will tour Indonesia, Brunei, Japan, China and the Maldives.
The objectives of the trip are multiple. First, Saudi Arabia wants to keep and expand its market share in Asia. China is the largest crude oil importer in the world, and Saudi Arabia is China’s top oil supplier. However, competition is stiff and growing amid an oversupplied market. Russia and Saudi Arabia have battled for several years over the Chinese market, with Russia fast gaining ground. While Saudi Arabia has a slight edge in terms of market share in China, the two exporters are roughly on par.
Moreover, the lifting of international sanctions on Iran last year added another oil exporter to the mix. “There’s a market-share battle going on mainly among the Middle East producers and Russia,” Olivier Jakob, managing director of Petromatrix, told Bloomberg in an August 2016 interview. “Rivals are making a big push into China.” Aramco has often invested in refineries abroad to ensure steady demand for its crude oil.
Perhaps more important than the level of oil exports to China is the preparations for the IPO of Saudi Aramco. Saudi officials are trying to raise investors’ interest in the public offering, slated for 2018, which will see about 5 percent of the company. The government has said Aramco could be worth $2 trillion, although some analysts believe it would only be a fraction of that amount. Related: OPEC Deal Cancelled Out By Rising Shale Output
In any event, Saudi Arabia needs Asian investors to make the IPO successful. The Saudi energy minister Khalid al-Falih billed the $7 billion investment in Petronas’ refinery as one that will boost the attractiveness of the IPO. “This will strengthen the equity story for Saudi Aramco,” al-Falih said in Kuala Lumpur on Tuesday. “Investors will be looking for a company that has breadth in its portfolio.”
Relatedly, another reason the Saudi monarch is visiting Asia is to grow non-oil economic ties with Asia. The Saudi government is at the beginning of what it views is a long-term effort to diversify the economy. Early reports suggest that the Asian trip could yield some results. Saudi Arabia has agreed to put up to $45 billion in a technology fund led by Japan’s SoftBank Group. Saudi Arabia and China also signed more than a dozen preliminary economic agreements last year that they’d like to push forward.
But it is impossible to ignore the political backdrop upon which the trip is occurring. Relations between Saudi Arabia and its long-time ally, the United States, have soured in recent years. The Obama administration’s détente with Iran, punctuated by the historic nuclear deal in 2015, greatly eased tensions between Washington and Tehran at the expense of the Saudi-American alliance. The alliance further deteriorated after the U.S. Congress passed a bill that would allow the families of 9/11 victims to sue Saudi Arabia for its involvement, a bill that was vetoed by President Obama but ultimately passed into law by a Congressional override. Related: OPEC Struggling To Hold On To Asian Market Share
On top of that, the mercurial and unpredictable Trump administration has left Saudi officials guessing. Riyadh is cautiously optimistic on the more hawkish position that the Trump administration has taken in regards to Iran, but the Saudis no longer feel they can count on rock solid support from the U.S. government. After all, it is still unclear who is really making policy in the Trump administration, with statements often contradicting each other and positions shifting from day to day.
Meanwhile, Saudi Arabia is hoping to engineer further gains in crude oil prices, with an eye on $60 per barrel. The OPEC compliance rate rose above 90 percent in February, evidence that members are making good on their obligations under the production cut deal. That fueled another round of price gains this week.
But Saudi Arabia does not feel that it can afford to sit back and hope rising oil prices will solve what it sees as longer-term problems. Thus, the trip to Asia.
By Nick Cunningham of Oilprice.com
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