Saudi’s Need Stable Oil Price Above $50 Before Aramco IPO Valuation

Crude oil continued its harsh decline falling 3% again today, matching yesterday’s declines. WTI oil is trading at 43.41 and Brent oil is hovering at 45.63 down over $1.25. Price declines were sparked after US weekly EIA inventory printed much higher than expected. Goldman Sachs continues to put the kibosh on any possible OPEC agreement. Crude demand from Europe and China has been falling while the supply glut persists, says OCBC Bank’s Barnabas Gan.

 

Russia’s energy minister has reportedly said that there was no need for talks to freeze output among major oil producers.

“A fair amount of the bearishness can be connected to recent comments out of Russia, indicating that they have little interest in coordinating with [the Organization of the Petroleum Exporting Countries at the moment,” said a commodity analyst at Schneider Electric.

Russian Energy Minister Novak said that with prices around $50 a barrel, it isn’t necessary for major oil producers to discuss freezing production levels, according to news reports. OPEC plans to hold an informal meeting on the sidelines of an energy forum in Algeria later this month to discuss ways to stabilize the oil market.

“Beyond the direct implications, the comments have weighed on prices based on Russia’s indication that $50 a barrel was an acceptable level,” said Fraser. “It speaks to the broader idea of improved efficiency and declining costs, and has bulls worried about the ability of production to hang on at these prices.”

Two years after triggering an oil price war, Saudi Arabia has seemingly had enough of cheap crude amid budget pressures, fear of a future supply shortage, and as it seeks to offload a stake in state-owned producer Aramco. The change in tone comes as OPEC and other producers such as Russia may resume talks on stabilizing output when they meet in Algeria later this month, after a similar effort to boost oil prices collapsed in April due to Saudi-Iranian tensions.

Since Khalid Al-Falih took over as energy minister, the tone has visibly shifted. He says the world needs oil above $50 per barrel to achieve a balanced market, and raised the prospect of Saudi Arabia resuming its role of balancing supply and demand. Outwardly, there is no sign yet of a definite change in policy. But behind the scenes, Saudi Arabia has been working towards boosting prices, rather than leaving that job to market forces.

At OPEC’s last meeting in June, held in Vienna, Al-Falih surprised some of his counterparts by proposing OPEC set a new output ceiling, according to several people familiar with the matter.

The government is trying to boost non-oil revenue and modernize the economy through a reform plan called “Vision 2030”, championed by Deputy Crown Prince Mohammed bin Salman, of which the centerpiece is the sale of a stake in Saudi Aramco. Sources in the oil industry say this partly explains the shift in tone on prices.

The Saudis “want higher oil prices for a better Aramco valuation”, one industry source said, adding that some think Aramco could be valued as high as $4 trillion.

Prince Mohammed has said he expects the initial public offering (IPO) to value Aramco at at least $2 trillion, but that the figure might end up being higher. Any valuation would account for oil price expectations and the size of Saudi Arabia’s proven oil reserves. Another industry source familiar with the matter agreed.

“A stable oil price at a moderate level would help an IPO. I don’t know if the IPO is the major factor – but it’s certainly a factor,” he said. “Saudi Arabia does not want to crash the price. Their target indeed would be somewhere north of $50 – $60 or so.”

Prices for natural gas, meanwhile, dropped 3% after an increase in weekly U.S. supplies of the commodity came in a bit higher than expected.