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Andy Pfaff - MitonOptimal South Africa - Saudi Aramco IPOThe world will become more familiar with the Saudi Aramco logo over the next 12 months, as the Saudi Aramco IPO – potentially the most significant IPO in the history of IPOs – draws nearer (See Fig 1: Note that the graph illustrates only the expected value of the IPO, not value of the full company).

As regular readers will recall, this is a subject we’ve covered before (The Biggest IPO in History – Weekly Comment no. 47 on 23rd November 2017), when we said: “because Saudi Arabia is the single most powerful country in OPEC … Aramco, through Saudi Arabia and OPEC, will seek to increase the price of oil before the IPO to increase the proceeds from the IPO … the extension of the current supply cuts is a foregone conclusion at the end of this month.”


Saudi Aramco IPO - Saudi Aramco IPO

Fig 1 Source:


The degree of NOPEC (OPEC & Non-OPEC) co-operation to get agreement on extending those production cuts, and the continued compliance by the producers with the agreed cuts, has been out of character for a disparate group with a poor history of cooperation and compliance. However, this cooperation has also significantly improved Aramco’s IPO prospects. This is visible from the comparison between OECD oil inventories and the Brent oil price, where falling inventories have resulted in rising oil prices for the last 18 months. (See Fig 2)

Oil Stocks - Saudi Aramco IPO

Fig 2 Source:

So how was this accomplished, what were the bargaining chips and what are the consequences of this grand global chess match? There was a clue in a press conference that followed the NOPEC agreement in January to extend the production cuts:

“Saudi Arabia’s oil alliance with Russia will last for decades and generations…” the Kingdom’s energy minister said, to the world’s scepticism. He added that the bilateral relationship between Saudi Arabia and Russia – two of the world’s biggest producers and exporters of oil – was key to the success of the deal. The Riyadh and Moscow alliance, once considered unthinkable, became a necessity in the face of a shared threat – the US shale industry – which three years ago triggered an oil price crash.

Things have more recently become clearer. Russian Energy Minister Alexander Novak and his Saudi counterpart Khalid Al-Falih spoke at a conference in Riyadh last week, the latest in a series of joint appearances that underscores their deepening ties. Then last week, the real crux of the deal emerged: “There are a number of (Russian) investors who would like to invest in the Aramco IPO,” said Kirill Dmitriev, chief executive of the Russian Direct Investment Fund. “Not only this. We have a Russia-China investment fund, and through that Russia-China investment fund we see a major interest in the Aramco IPO from a number of leading Chinese institutions.”

The reason for the Saudi-Russian co-operation in supporting the oil production cuts is now easy to see. Russia gets a geared return from this elevated oil price via their own production and their stake in Aramco. Simultaneously China, whose economy is slowed by rising energy prices, has now engineered a significant hedge against further rises in energy prices: they partially offset the increased costs of higher oil prices by benefitting from their stake in Aramco.

So that is how the grand oil production reduction plan was accomplished. What are the consequences of the repositioning of these chess pieces, bearing in mind the Saudi deal to buy 17 nuclear power stations from Russia in 2015?

It appears that the USA, with its fracking-led oil & gas production increases and exports, has unwittingly been the catalyst for a global geopolitical re-alignment. Saudi Arabia, the greatest energy producer of the last 100 years, has now pivoted from an alliance with the West to an alliance with the East, specifically Russia and China.

It seems that the West has been completely out-thought and outmanoeuvred by nations that are able to sublimate their desire for quick fixes and focus on long-term strategic planning.

MitonOptimal’s portfolio construction and investment planning are just the same. As tempting as it may be to chase the current “hot trade”, it is no substitute for proper strategic planning.

How does the old saying go? “Fools rush in…!”

Download: Weekly Comment -March 1 2018 – AP




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