Oil-Related Developments - November 2017

1. Oil prices: Oil prices touched a two-year high on Friday, 10 November, with Brent reaching $ 63.6 and WTI at $ 56.82; prices have risen by about 14% over the last month. Prices have risen due to: drawdown in inventories, especially in the US; better compliance with voluntary production cuts by the Organization of the Petroleum Exporting Countries (OPEC); slower pickup in US shale oil production, and continued geopolitical uncertainty in West Asia following the shake-up in Saudi Arabia.

Analysts expect that oil prices could remain high in coming months due to three reasons: one, the kingdom’s crown prince could translate the ongoing sabre-rattling against Iran into a region-wide conflict; two, the problems relating to the KRG in Iraq could disrupt supplies, and three, President Trump could impose new sanctions on Iran, targeting its oil supplies. Analysts also note that, if WTI were to cross $ 60, there would be a surge in shale oil production, though it might take some time to enter the market.

2. ARAMCO IPO caught between US China Competition: In early 2016, ARAMCO had announced that 5 percent of its shares would be sold on the international markets, with suggestions that, with ARAMCO valued at about $ 2 trillion, the 5 percent sale would yield $ 100 billion and provide much-needed funds for the kingdom’s ambitious Vision-2030 programme.

However, from the beginning of 2017, estimates of Saudi Aramco’s market value have begun to decline. Appraisals now claim that the company’s share capital is only worth $1.5 trillion, then $1 trillion. The consulting firm Wood Mackenzie estimated Saudi Aramco’s worth at $400 billion overall, bringing it closer to US-based ExxonMobil, whose market value is about $ 350 billion.

Analysts blame this development on the pressure Washington is putting on Riyadh which in turn is in response to the pressure being exerted on Riyadh by China: the latter wants to buy oil from Saudi Aramco in renminbi instead of dollars. China is currently the world’s biggest oil importer and is also the Saudi oil industry’s biggest customer. Several oil exporters that sell to China have already partially or entirely begun to settle their accounts in renminbi, including Nigeria and Iran. Russia has also recently begun to sell some oil to China for renminbi, although only a small percentage so far.

Saudi Arabia, however, is heavily dependent on the US and, so far, has refused to settle its accounts in renminbi, encouraging Beijing to seek other suppliers to take Riyadh’s place. Saudi Arabia used to be China’s biggest foreign supplier of oil, but recently Russia has squeezed it out of that number-one spot.

The US, on its part, has sternly warned Riyadh to refrain from any move to replace the dollar with the renminbi in its transactions with China, lest other players in the oil market follow suit. Reducing the market value of ARAMCO is one source of pressure on the kingdom.

Another complication that has now emerged is that China has offered to directly buy out 5% of Saudi Aramco, allowing the Saudis to forgo listing the shares on Western stock markets. China is also prepared to pay a “fair” price (about $100 billion) for the 5 percent share on offer. The Chinese government has already announced that it is forming a consortium of energy and finance companies, with China’s sovereign wealth fund, to purchase a chunk of the Saudi company. This move by China has neutralized the US threat to disrupt the sale of Saudi Aramco, though it is not clear that the kingdom will risk upsetting the US by taking renminbi for its oil sales.

In a recent move to compete with the US, the UK government has agreed to a $2 billion loan guarantee for Saudi Aramco. According to Bloomberg, the unusually large export credit guarantee, designed to finance the purchase of British goods, is possibly an attempt to attract the IPO to the London Stock Exchange.

This UK loan guarantee follows a public plea on Twitter by U.S. President Donald Trump for Saudi Aramco to choose the NYSE for the international portion of the listing, saying he “[w]ould very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!”

 

November 15, 2017

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About the Author

Ambassador Talmiz Ahmad joined the Indian Foreign Service in 1974. Early in his career, he was posted in a number of West Asian countries such as Kuwait, Iraq and Yemen and later, between 1987 and 1990, he was Consul General in Jeddah. He also held positions in the Indian missions in New York, London and Pretoria. He served as Indian Ambassador to Saudi Arabia (2000-03; 2010-11); Oman (2003-04), and the UAE (2007-10). He was also Additional Secretary for International Cooperation in the Ministry of Petroleum and Natural Gas in 2004-06. In July 2011, the Saudi Government conferred on him the King Abdul Aziz Medal First Class for his contribution to the promotion of Indo – Saudi relations. After retirement from the Foreign Service in 2011, he worked in the corporate sector in Dubai for three years. He is now a full-time academic and holds the Ram Sathe Chair for International Studies, Symbiosis International University. He has published three books: Reform in the Arab World: External Influences and Regional Debates (2005), Children of Abraham at War: the Clash of Messianic Militarisms (2010), and The Islamist Challenge in West Asia: Doctrinal and Political Competitions after the Arab Spring (2013). He writes and lectures frequently on Political Islam, the politics and economics of West Asia and the Indian Ocean and energy security issues.