Saudi Arabia is likely targeting oil prices at $80 a barrel to boost the valuation of its oil giant Aramco ahead of its much-hyped IPO and to help finance increasingly ambitious domestic policy plans, Bloomberg reported on Tuesday, citing people who have spoken to Saudi officials.
Although Saudi officials have been careful not to point to a specific oil price target in private discussions over the past month, “the inescapable conclusion from the conversations was that Riyadh is aiming for $80,” according to the people who spoke to Bloomberg on the condition of anonymity.
A couple of months ago, Saudi Arabia was reportedly targeting oil at $70, but that was before Riyadh admitted that Aramco’s initial public offering could take place in 2019, instead of in the second half of 2018, as it has been planned for years.
In an interview with Time magazine last week, Saudi Crown Prince Mohammed bin Salman—the proponent of the Saudi economic overhaul to diversify from oil—for the first time linked oil prices with the Aramco IPO.
Asked about the delayed listing, the Crown Prince said:
“We do not delay it. We said we will be ready to IPO around 2018. And we are ready. We did all the laws. We did all the steps that are making us ready to IPO it. Now it’s a matter of choosing the right time. So we believe oil prices will get higher in this year and also get higher in 2019, so we are trying to pick the right time. But we are ready to IPO it now if the time is right.” Related: Russia Wants To Drop Dollar For Oil Payments
Saudi Energy Minister Khalid al-Falih has also recently signaled that the Kingdom would rather overtighten the market instead of leaving the job of erasing the glut undone.
In February al-Falih said that “If we have to err on over-balancing the market a little bit, so be it.”
According to Bloomberg’s sources, however, the Saudi ambitions for oil at $80 is not shared by all OPEC members, because some of them are worried—privately—that the Saudis are targeting too high an oil price that could further boost U.S. shale production.
By Tsvetana Paraskova for Oilprice.com
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Please do not include the word "secretly" if this is in the title of the headline article posted on Oilprice.com...let's be honest, this news was rather deliberate.
Every time this jawboning occurs, I'm going to remind everyone that in early 2016 the Kingdom said that they can produce oil at $10/bbl (a price no other producer can match). Just the other day on this site I commented the same thing on an article which stated the Kingdom is on the verge of economic collapse, and that was over the weekend. Now, just two days into the week, WTI is over $3/bbl higher despite record production in the U.S. and soaring rig count data.
But I am curious: Who is going to do the bidding for the Saudis? Hedge fund managers? Who is going to pay the extra money it is going to cost to fill up everyone's gas tank? Who will pay the additional fee for fuel cost increases when booking a flight? Are those that are profiting feeling generous enough to cover this tab? Why is it we pretend to have a market which essentially is only allowed to ever go up and is never based on the laws of supply vs. demand? (e.g., Case-in-point: Today oil is up on news of China easing on tariffs, yesterday WTI was up as headlines stated "oil prices rise with the U.S. stock markets.")
Last, the best question of all: Does this ever work the other way around? Why is there such a common term as "short covering" but yet no one knows what its antonym "long unwinding" is because it never is allowed to happen!
So there is no surprise if Saudi Arabia targets an $80 oil price. This has nothing to do with the IPO of Saudi Aramco. I am on record saying regularly for the last four months that Saudi Arabia will eventually withdraw the IPO altogether.
My opinion is based on the following factors: first, listing Saudi Aramco on the Saudi stock market, Tadawul, will overwhelm it creating liquidity concerns; second, Saudi Arabia is no longer financially in need of the IPO, and third, there is a huge risk of American litigation if the IPO was listed in New York, or London or Hong Kong.
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. In fact, S&P Global Ratings raised on Friday Saudi Arabia's credit rating to a stable outlook on the expectation that economic growth will accelerate in 2018 as it continues to boost spending.
During 2017, the ultimate objective of Saudi Arabia and other OPEC members was to establish a price floor of $60 rising to $70 in 2018 and $80 by 2020. As for a price ceiling, their objective is a minimum of $75 in 2018 rising to $85 in 2019 and $100 or higher in 2020.
As for US shale oil production, it will continue irrespective of how high or how low oil prices might reach. The shale drillers find themselves in a vicious circle. They need to continue production even at loss just to get loans to keep them afloat and without production they can’t pay outstanding debts which have been on the rise far above the $200 bn extended to them a few years ago. They work on the principle of “robbing Peter to pay Paul”.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
A non-democratic government with a NOC monopoly with unclear private property and minority investor rights is not going to get a full valuation commensurate with oil reserves, cash flows, etc. And access to those reserves and cash flow numbers are questionable, too.
As for a Saudi-only IPO listing, please. If they don't have a New York or London listing, they should just cancel it.