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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Saudis Ready To Swing Oil Market Into Deficit

Saudi Oil

Saudi Arabia is undergoing a truly seismic shift in its economy, politics, and society, all thanks to the oil price crash of 2014. Crown Prince Mohammed bin Salman, commonly referred to as MBS, would likely not have had the opportunity to initiate the sweeping changes envisaged in Vision 2030 had it not been for the price collapse. Now, Riyadh needs oil prices to rise as high as possible for the plan to succeed — and is even ready to tip the market into a deficit to that end.

Saudi Arabia used to be OPEC’s most influential price dove, according to Bloomberg’s Grant Smith. Now, the kingdom has adopted a markedly different approach. Saudi Arabia is now focused on pushing prices as high as it can for a very simple reason: Aramco’s IPO.

There are more than enough doubts surrounding the listing of the world’s largest oil company. There’s no certainty about the location of its international listing, and some observers have even argued that Riyadh might opt for a private placement instead so as to ensure the entire 5 percent that is set to be offered will find a buyer.

Aramco’s IPO is crucial for Vision 2030, as the proceeds from the sale will be the fuel that this ambitious plan runs on. While analysts disagree strongly on exactly how much Aramco is worth, it’s clear that the higher oil prices are, the higher the valuation for this oil giant will be.

After a strong rally at the end of 2017 and the beginning of 2018, Brent and WTI have both fallen from their multiyear highs, as the fast growth in U.S. shale production offsets the OPEC cuts. Despite OECD inventories nearing their five-year average, oil prices are refusing to rally. In fact, some analysts are warning that the price slide we saw this month is only the beginning of a much bigger decline.

Related: Saudi Arabia Wants $70 Oil

Riyadh doesn’t want to hear this prior to the IPO. It’s not something the Saudis want to hear in the coming years either, because the price of oil doesn’t just need to be higher now — it needs to remain high in the near to medium term to ensure the Aramco IPO’s success.

So, what’s an oil kingdom to do? Last week, Energy Minister Khalid al-Falih suggested that OPEC should change the way it measures global inventories because the current method produces unreliable data. The current method is based on the five-year average inventory level for the members of the OECD. But that five-year average is a moving target, as OilPrice’s Nick Cunningham recently noted, and in the last five years it has reflected a substantial glut. So, based on the five-year OECD average, the market rebalancing may turn out to be a reduction of the overhang as opposed to an impressive reduction in the global oil glut.

Of course, there’s always the possibility of a conflict in the Middle East driving oil prices up — but geopolitical unrest is far from a guarantee. The recent unconfirmed (and likely to never be confirmed) reports about Saudi Arabia working together with Israel to thwart Iran’s growing influence in the region were followed this week by an open warning from Tel Aviv that it’s ready to confront Iran directly, and Iran issuing an in-kind threat that promised to “level Tel Aviv.” For oil price analysts, these growing tensions can never be ignored.

Another factor that no producer can control is demand. For now, demand forecasts are overwhelmingly rosy, but some observers are wary of too much optimism. Higher prices themselves are a negative factor for demand growth.

So, Saudi Arabia is once again ready to do whatever it takes to push prices up. But in an increasingly complex oil market, it remains to be seen if the oil kingdom can achieve its lofty goals.

By Irina Slav for OilPrice.com

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  • John Brown on February 21 2018 said:
    I'm glad Saudi Arabia is working with the USA and Israel against that murderous Islamic hate state Iran, but they've had over a generation to diversify and modernize their economy, and the rest of the world has no obligation to pay for it.
    That aside, let Saudi Arabia play games short term to take the market into deficit if they can. American producers should be looking at this information and recognizing that Saudi Arabia is going to manipulate the price of oil up for the rest of this year. That means huge opportunity to race ahead with production knowing Saudi Arabia will keep prices high regardless of U.S. output, and they can certainly idle enough production to do that for a year or two.
    So the oil/gold rush in the USA is should go into overdrive.
  • Mamdouh G Salameh on February 21 2018 said:
    It stands to logic that when oil prices are high Saudi Arabia’s IPO brings more money. Saudi Arabia needs a price of $70/barrel or higher for a successful IPO of Saudi Aramco.

    Still, the OPEC/non-OPEC production cut agreement is doing a sterling work buoyed by very positive oil market fundamentals. The global oil market is virtually re-balanced. Oil prices are heading towards $70 and beyond this year without Saudi Arabia taking any further action and in spite of exaggerated claims about increases in US oil production.

    Some time ago I said that there is a real possibility that Saudi Arabia might decide to withdraw its IPO of Saudi Aramco altogether.

    The Aramco IPO was originally proposed as part of Saudi Arabia’s Vision 2030 with the objective of securing an estimated $100 bn in support of Saudi diversification and the creation of a modern Saudi economy.

    But the recent anti-corruption drive has already netted them an estimated $106 bn according to Saudi official sources. Furthermore, eliminating the subsidies on water, electricity, gasoline and food will also save them some $100 bn and a peaceful settlement in Yemen would save them an estimated $72 bn being the current cost of their involvement there.

    The recent rise in oil prices is already starting to repair the damage inflicted on the Saudi economy by the oil price crash in 2014. So financially, Saudi Arabia has no need for the IPO.

    Keeping Saudi Aramco totally under Saudi ownership enables Saudi decision-makers to decide oil policy and the freedom of global investments without any foreign interference and without any risk of litigation by the United States.

    The IPO or any Saudi investments or funds in the United States could be at risk by the legislation passed by the US Senate on the 17th of May 2016 that would allow families of September 11 victims to sue the Saudi government for damages. It must next be taken up by the US House of representatives. If it became law it would remove the sovereign immunity, preventing lawsuits against countries whose citizens were found to be involved in the attacks. The minute one law case is launched by an American citizen against the Saudi government, all Saudi assets in the US will be frozen.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Vishwas on February 22 2018 said:
    Saudi's self interest at the cost of other oil producing countries will not work. None will agree starve to meet Saudi's goal. Saudi will then happily let oil price crash. No one believes Saudis. The only possibility is Israel-Iran war instigated and supported by Saudi. Be prepared for the war and oil prices shooting to $90.
  • Douglas Houck on February 22 2018 said:
    Exactly what the future holds is always an unknown, but it is highly unlikely there will be an Israeli/Iranian war. Israel no longer holds much of a military advantage in the ME, other than it's nucs, which are not very usable. If Israel is hot headed enough to start a war with Iran, it will be the last one it has for a very long time.

    The price of oil will have to rise or fall for other reasons, hopefully just fundamental.
  • LM on February 28 2018 said:
    Fatih Birol is losing any shred of respectability.

    To be as irresponsible as he is and get away with it is nothing short of amazing and the corruption of the truth to suit the politics and demands of some powerful interests that will result in serious problems to come in a few years time. The damage is done. $90 oil will seem cheap in 2020.
  • Maya on February 28 2018 said:
    Saudis are hanging by thread, Islamic state is knocking on their door with Russian support. US is running out of money and end is not far for Royal. Where they can hide , in USA. Iran is a silent ready with nuclear to take over Mecca.

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