Complex Made Simple

This Thursday’s OPEC-Aramco coupling has global implications

OPEC and Aramco share a common goal: keep oil prices up

OPEC hosts its bi-annual meeting on Thursday in Vienna, Austria. The 14-member group will then hold talks with non-OPEC allies on Friday An upcoming meeting between OPEC and non-OPEC allies could see the group deepen oil production curbs The world may also be heading for an even greater oversupply of oil

One day. 2 major decisions. 

This Thursday December 5, 2019, a clash of interests will shake oil economies at the core.

On the one hand, Saudi Aramco will announce its true share price and on the other OPEC met to determine its production cut strategy, and the two are interconnected.

The world is watching in anticipation. 

Read: OPEC predicts Oil and Gas will still supply most Global Energy Demand in 2040

Oily story lines

In September, Saudi King Salman bin Abdulaziz replaced his nation’s energy minister Khalid Al-Falih with one of his sons Prince Abdul Aziz bin Salman.  

That could spell a change in policy from price control to global oil share dominance, i.e from oil production cuts to oil pumping.

OPEC hosts its bi-annual meeting on Thursday in Vienna, Austria. The 14-member group will then hold talks with non-OPEC allies on Friday, aka OPEC+.

About the world’s biggest IPO, lower prices aren’t what the Saudis want right now, given that the long awaited pricing of the Aramco IPO also occurs on Thursday and despite the amount of stock available for trading will only be 0.5% of the company.

If oil falls, the IPO may struggle 

The U.S. oil and gas industry is struggling with WTI prices in the $50-$60 range and leading to shares of energy dropping and S&P Oil & Gas Exploration ETF down 40.7% in 12 months.  

But does the world want oil that so many are hoping its prices to rise?

The U.S.-China trade war has put a damper on demand as talks on a global recession rearing its ugly head. 

More cuts coming…most likely

An upcoming meeting between OPEC and non-OPEC allies could see the group deepen oil production curbs, energy analysts told CNBC, although an extension of existing cuts and an emphasis on stricter compliance is still seen as the most likely outcome.

OPEC+, has reduced output by 1.2 million barrels per day (b/d) since the beginning of the year. The current deal runs through to March 2020. 

“I think there is a possibility that we see around 400,000 barrels per day deeper cuts,” Amrita Sen, chief oil analyst at Energy Aspects, told CNBC’s Dan Murphy in Vienna on Wednesday.

Saudi bears the burden of the largest share of OPEC’s production cuts.

International benchmark Brent crude traded at $62.93 on Thursday morning, down around 0.1%, while U.S. West Texas Intermediate (WTI) stood at $58.29, down more than 0.2%.

Brent crude futures remain around 15% lower when compared to an April peak reaching nearly $75 per barrel in April after U.S. sanctions on Iran and Venezuela limited world supply, with WTI down 12% over the same period.

Read: Outside of Saudi investors, are global fund managers keen on buying Aramco shares at $1.7 trn valuation?

On Monday, Reuters reported that Riyadh wanted to deliver a positive surprise to the market before the listing of Aramco, citing two sources familiar with the matter. The report indicated OPEC+ would add at least 400,000 b/d to the current deal.

However, Russia has so far been opposed to deeper cuts — as well as an even longer extension of output curbs.

Read: The Saudi Aramco IPO and Brent crude oil prices will fly in December!

Oversupply?

The world may also be heading for an even greater oversupply of oil, and that possibility could drive down fuel and energy prices. 

Prices could stay under pressure as Norway also just opened up its biggest new oil project in a decade and Brazilian production is also on the rise.  

There’s more oil coming online from non-OPEC nations including the U.S., Canada, and Guyana, which will more than make up for any drop in production, according to IHS Markit.

Aramco oversubscribed

Saudi Aramco company will issue 3 billion shares at a price of 32 riyals each, meaning the 96 billion riyals ($26.1bn) raised will be the highest for a stock market debut.

It will eclipse the $25bn debut made by China’s eCommerce giant, Alibaba, on the New York Stock Exchange in 2014.

The offer was 4.65 times oversubscribed, with the offering process generating 397bn riyals ($108bn) of institutional subscriptions.

Retail investors had already subscribed for 47bn riyals ($12.9bn) , or more than 1.48 billion shares, when the offer closed to them last week.