Interpreting Middle East Economic News and Analyzing Market Trends

Saudi Arabia backtracks on Aramco sale but it still needs the money

Saudi Aramco

On Friday (Jan. 8), news hit the markets that Saudi Arabia might take its crown jewel (Aramco) public to help offset the country’s mounting budget deficit.  On Monday (Jan. 11), the story died before all the speculative angles of why the Saudi’s might be interested in selling could be analyzed.  The truth is a sale of Aramco will eventually happen but not until all other sources of raising cash are exhausted.  The bottom line is that the country needs cash and fast.


I have written extensively on the fall of oil.  In one of my older posts from 2014 (here) I state that the fall in the price of oil is not due to OPEC, Saudi Arabia or China.  OPEC has no control over the price of oil, the oil traders and speculators control the market.  Just take a look at an oil price chart going back to the 1990s to today to see how volatile and crazy the market has gotten since 2005.  Why 2005?  That’s when oil derivatives came on the scene along with oil ETFs/ETNs.  Yet despite all of this evidence, the media outlets keep repeating the same story over and over again as if somehow by repeating it, it will one day become truth.  It’s easier to blame OPEC and Saudi Arabia than the traders and speculators.  It is also inline with politicians’ view on why oil is falling.


As a result of traders and speculators beating down the market, Saudi Arabia and other OPEC members are facing some serious fiscal issues, none of which they have ever seen… ever.  Why?  Because this time it is different.  This time the problem is much bigger.  In the 80s and 90s OPEC learned to deal with low oil prices for a long time.  Back then they didn’t have the massive budgets they have now, nor did they have the millions of additional citizens lining up with their hands out.  OPEC can no longer handle low oil prices.  Low oil prices raise the risk of burning through all of their cash, or worse, causing civil unrest unlike they have ever seen in the past.


Back to Saudi Arabia’s recent news headlines…


Friday January 8, 2016:


Amid a global oil supply glut, Saudi Arabia is thinking about listing shares in its state-owned oil company, Saudi Aramco. One of the biggest companies in the world, Aramco is also the world’s biggest oil producer and is worth “trillions of dollars,” according to Saudi officials.

On Friday Saudi Aramco confirmed in a statement that it had been studying various options to list a percentage of its shares in the capital markets.

“Once the study of these various options is complete, the findings will be presented to the Company’s Board of Directors which will make its recommendations to the Saudi Aramco Supreme Council,” the company said on its website.

This proposal is consistent with the broad and progressive direction pursued by the Kingdom for reforms, including privatization in various sectors of the Saudi economy and deregulation of markets, which the Company strongly supports.”

Read the full story from CNBC.


Monday January 11, 2016:


Saudi Arabia is considering selling shares in refining ventures with foreign oil firms but would not offer a stake in the crude oil exploration and production operations of state oil giant Saudi Aramco, sources familiar with official thinking said.

Some Aramco managers have been informed that the company is looking at listing shares in “joint downstream subsidiaries” at home and abroad, the sources said.

One option is to create a holding company that would group together Aramco’s stakes in the downstream subsidiaries, one source said.

Shares in the parent firm would not be offered, he added.

“The holding company is the one which could be listed, not Aramco itself,” he said, declining to be named because of political sensitivities.

The global energy market has been awash with speculation since Deputy Crown Prince Mohammed bin Salman appeared to indicate in an interview with The Economist magazine last week that Saudi Arabia might sell shares in Aramco, as part of a privatization drive to raise money in an era of cheap oil.

On Friday Aramco, the world’s largest oil company, issued a brief statement saying it was considering options including the stock market listing “of an appropriate percentage of the company’s shares and/or the listing of a bundle (of) its downstream subsidiaries”.

The government will never give up its crown jewel,” said a senior banker in Riyadh.

Instead, authorities are looking at accelerating plans that have been in the works for many years to sell shares in part of Aramco’s vast refining and petrochemicals empire, which by itself is estimated to be worth tens of billions of dollars.

Read the full story from CNBC.


An Aramco IPO would have easily become the world’s largest IPO in history with a market cap of over $1 trillion.  The company dwarfs the size of all other major oil producers combined as you can see from the chart below.


Aramco Market Cap RBS

Click on image to enlarge.


Saudi Arabia is already facing a budget deficit of $100 billion and is burning through its foreign reserves at the fastest pace in its history… and this is for 2015 when the average price of oil was in the $50s.  Oil is trading in the $30s today and will likely stay in this range for the rest of the year.  This means an even larger budget deficit and even more foreign reserves spent.  The chart below from Deutsche Bank and the IMF are very conservative given the continued drop in oil prices.


Saudi Debt level from DB and IMF

Click on image to enlarge.


At this rate, the country will have no foreign reserves in five years.  It could be sooner depending on when the price of oil finds its bottom and how much the war in Yemen costs.  It does help matters to see that Iran and Saudi Arabia are on a clear path towards a serious confrontation in the not so distant future.


Some immediate relief on the growing Saudi budget deficit may come in the form a depreciation of the Riyal peg against the US dollar.  A weaker Riyal means that the budget deficit shrinks in Riyal terms since the government’s main revenues come from oil priced in dollars.  Economists inside Saudi Arabia as well as leading business figures say a Riyal depreciation will not happen, but this to me means that it is coming sooner than later.  I expect Saudi Arabia to adjusts in US dollar peg sometime this year, depreciating the Riyal by at least 5% against the dollar.  You can read more on the pressures the Riyal is facing here from the Telegraph.