Saudi Arabia is happy with the rise of crude oil prices. The Opec, Russia and several other producers began to reduce supply in January 2017 in an attempt to erase a glut. The supply-cutting deal involves cutting 1.8 million barrels a day through March 2018, subsequently extended until December 2018. Saudi is looking at US$80 or even US$100 a barrel.
Considering that the global crude oil hasn’t reached the target US$80 a barrel, the meeting in this coming June among those players agreeable to the supply cut has a common agenda – to do nothing. Yes, what they need to do is just sit back and watch the crude oil goes north. Saudi wanted oil at US$100 more than anybody else, and it’s not hard to understand why.
The kingdom wants a high price of oil so that Aramco share sale in an IPO (initial public offering) to be not only successful, but also profitable. Saudi Aramco is too big and too important for the kingdom. It cannot fail. The kingdom is planning to sell 5% of Aramco and claims that the world’s biggest oil producer could be worth US$2 trillion, more than 6 times the value of Exxon Mobil.
Selling 5% of Aramco could raise US$100 billion for the cash-hungry Saudi Arabia. That would make Aramco’s IPO the largest in history – about 5 times the current record holder Alibaba, the Chinese e-commerce company which went public in New York in 2014 and raised US$21.8 billion. So far, Aramco has paid out US$180 million to advisers globally since 2002.
Yet, besides not knowing where to list – either New York or London – the company, the most frustrating factor has been the low crude oil price. Saudi is also waiting for the Saudi stock exchange – the Tadawul – to be granted emerging market status by index compiler MSCI before proceeding with the IPO, a review scheduled in June this year.
However, there appears to be another problem hitting Aramco IPO. President Donald Trump isn’t happy with the skyrocketing crude oil price. On Friday, the U.S. president launched his attack on OPEC, the same way he had attacked China on trade war as well as Russia on Syria chemical weapon. He slammed OPEC for keeping oil prices artificially high.
Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!
— Donald J. Trump (@realDonaldTrump) 20 April 2018
Trump tweeted – “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” Obviously, the POTUS hopes to use the same trick that he has had used on China, Russia and North Korea to force OPEC to do what the U.S. desires.
But unleashing his frustration against OPEC can only do so much. The supply cut was a plan that involved not only OPEC but also the Russian. It would take a miracle for Russia to do the United States’ bidding after the Americans sent 105 cruise missiles into Syria, one of very few allies of Kremlin in the region. Trump has barked at the wrong tree.
The right person to call is Saudi Arabia. Donald Trump can actually threaten the kingdom to produce more oil so that the price could be brought down, of Saudi wants to preserve the friendly relationship with the United States. This will mean forcing Saudi to abandon the 1.8-million barrel a day of supply-cut implemented since January 2017.
The question is – will Russia and other OPEC and non-OPEC countries play ball just because Trump is upset that Americans have to pay more for the fuel at stations, which could contribute to inflation? Trump thinks so. He thinks that if Saudi, the de-facto leader of OPEC, increase its production, the rest would follow accordingly.
Saudi Arabia is caught between a rock and a hard place. It has just begun to taste the fruits of its labour, losing market share to American shale drillers while waiting patiently for the oil price improving to the current level of US$70 a barrel. The listing of Aramco is also vital to the survival of the kingdom. However, at the same time, it cannot offend the U.S. president.
What else can the POTUS do if Saudi decides to play dumb and ignores him? The U.S. government can always threaten to use the country’s Strategic Petroleum Reserve, currently stands at 665.5 million barrels, as a weapon against the OPEC and its allies. That would flood the global market with a sudden flow of oil and bring down the price.
But is Trump ready to weaponize the U.S. Strategic Petroleum Reserve to get what he wants, the same way he slapped China with new tariffs and bombed Syria with cruise missiles? Perhaps Saudi should remind Trump that he should take the blame for the high oil prices too. His trade war with China and military strikes in Syria have also pushed up the prices.
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