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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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What Investors Can Learn From Aramco’s CEO

Oil flaring

Uncertainties in the oil market have highlighted the news for weeks now, collecting everyone’s attention. The IEA’s recent forecast is generating optimism for oil, estimating that demand for crude will grow faster than expected at an average level of 1.3 mb/d over the year. This along with several upcoming events will play a key role for oil, adding to the ambiguity of its future value. We’ve already seen the price of both WTI and Brent surpassing the $50 mark at the end of last year and Brent reaching over $56 per barrel this past month. Both benchmarks dropped $3 over the course of the first weekend in January but have since resurfaced. Investors are interested in how President Trump’s policies will impact the market as well as how OPEC’s supply cuts will play out.

Then we have Amin Nasser, the CEO of Saudi Aramco, who is focused on the long-term future of oil. Last week, at the World Economic Forum, Nasser stressed the importance of further capital investment in the industry. He believes $25 trillion needs to be invested in oil capacity over the next 25 years to continue meeting demand. This is quite a statement especially in a time when producers are making an effort to limit supply.

Saudi Aramco is the largest producer of crude oil in the world and a leader in developing new forms of energy. Nasser emphasized the relevance of renewable energy but doesn’t believe it’ll replace oil’s vitality. He acknowledged the fact that demand for oil will exist for decades and as such needs to been prepared for.

Coming from an executive of a leading oil producer, Nasser’s $25 trillion figure should be taken seriously. Oil rig counts have decreased in recent years with profits narrowing for suppliers, not able to pump at an affordable cost. With rising oil prices, however, we’ve begun to see an increase in rig count in several countries as reported by Baker Hughes. Demand and rig count are both expected to continue increasing, showing signs that the industry is certainly returning to a growth cycle. Related: Large Rig Count Gains Rock Oil Markets

Long-term investors should look to companies prioritizing the exploration of new oil fields as it supports Nasser’s notion of continued industry growth. For investors having doubts about the next couple months, they should be reassured that their investments will continue to grow for years to come. Oil field service companies such as Baker Hughes and Halliburton would be strong long-term investment choices since producers will be heavily reliant on these types of companies. Investors should keep a close eye on Aramco as they’re in talks for valuing an IPO, likely going public sometime next year.

As for the price of oil, speculators are unsure where it’ll move next. There’s a general consensus that crude will see a downward trend throughout the remainder of the year. President Trump is pro-fracking giving economists the impression the United States will ramp up production, potentially interfering with OPEC’s cuts. If this occurs, investors should look for potential profits on a spread between the two region’s benchmarks. One thing remains certain, though, capital investment needs to be at the center of oil majors’ concerns if they hope to take advantage of the industry’s expected growth.

By Michael McDonald of Oilprice.com

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