The global alignment in energy is shifting, also.  A sign of the shift was demonstrated with Saudi Arabia’s Vision 2030 economic overhaul and the government’s planned initial public offering of Saudi Aramco, its national oil company.  As one money manager put it last fall: “If Saudi Arabia is selling its oil company, what does that say about their view of the long-term future for the oil business?”  Given his view of the answer, he was staying away from energy investments.  While probably an overstatement of the significance of the IPO, it is a recognition that an energy transition is underway, and for Saudi Arabia it means an economic transition is necessary.  This view is also a statement about how energy is currently being viewed by the stock market, which is understandable following the industry’s dismal financial performance over the past few years.  

Saudi Arabia’s transition is not only economic, but it is social, too.  The transformation of Saudi society is necessitated by the need to provide jobs for the youth of the country.  Nearly 20% of the nation’s population is between the ages of 15 and 24 years old, and just over half the population is under the age of 25.  Creating jobs for these youths will help reduce the financial burden on the government and the economy from all the imported labor needed now.  Allowing women to drive, a recent decree, will eliminate the need for drivers and free up substantial consumer money that will now be available for spending.  The social transformation is also playing a role in the geopolitical struggles between the Shia and Sunni sects in the Middle East.   

Eoin Treacy's view

Here is a link to the full report.

Saudi Arabia is not exactly the most politically secure place in the world right now which is going to have an influence on the valuation of Saudi Aramco. Exxon Mobil is the company that tends to get the most accommodative treatment from investors because of its long history of dividend increases and good governance. The big question for Saudi Arabia, regardless of reserves, is what kind of discount the market will demand for accepting the governance risk attached to the company. That is especially true with the UK having had to alter disclosure rules in its efforts to secure the IPO.

This point highlights how important a high oil price is to Saudi Arabia’s ambitions for both a successfully IPO and high valuation. The agreement to limit supply agreed between OPEC and Russia is an important part of the strategy which may have had a delayed start but is certainly working.

Brent Crude Oil remains in a staircase step sequence uptrend where reactions since July have all been less than $5 while rallies following breakouts have generally been around $8. If the consistency of the trend is to remain intact the next reaction will begin somewhere between current levels and $70.

Once the IPO has been completed, apparently sometime later this year, Saudi Arabia will have less incentive to limit supply.