Daily Management Review

Why Saudi Aramco's IPO will result in a problem for the oil market


06/09/2016


Saudi Aramco state oil company's IPO can turn into extremely unpleasant consequences for the oil industry in the long term.



pixabay
pixabay
Bernstein research firm said that Saudi Aramco’s IPO, which is said to occur in 2018 and will be one of the most ambitious in the history of the markets, may negatively affect other companies, which will be going to place their shares on the market in 2018.

The main argument of Bernstein experts is that once the IPO is held, report to shareholders is provided and current levels are increased, smaller oil-producing countries may suffer.

In the long term, that is, after the IPO, Aramco’s activity is likely to become more efficient and increase the production capacity up from the current level, of course, if resources permit. However, the oil market will get all the negative consequences, given the modest levels of additional capacity, which is expected to introduce in Saudi Arabia over the next 5 years.

It is also unclear how the privatized Aramco is going to manage spare capacities. The newly appointed oil minister of Saudi Arabia said that "decisions concerning production and capacity should be taken by the government, with the result that companies would demonstrate the advantages of this system to investors". Spare capacities, however, are likely to be maximized, which could lead to an increase in volatility in the oil market.


Aramco’s planned IPO is part of the "Outlook 2030", the initiator of which was the Deputy Crown Prince Mohammed bin Salman. The plan is aimed to lead the country away from the "oil dependence". In fact, IPO is meant to become a new source of income for the country, which, among other things, seeks to enhance the role of the services sector, as well as increase revenues from tourism to Islamic religious shrines. If a country will not manage to diversify its economy and get away from dependence on oil, the kingdom's economy will have to face an economic glut and stagnation.

At the same time, Bernstein’s experts noted if Aramco wants IPO to be successful, Saudi Arabia will have to change its strategy in the global oil market.

"Through the IPO, Saudi Arabia wants the oil market to remain stable as long as possible, and oil prices -  "favorable". This suggests that in the next couple of years, Saudi Arabia will do everything possible to keep the same state of affairs and keep prices at a sufficiently high level, because there could be no question of IPO in case of low oil prices. Rather, the kingdom would do everything in its power to keep the balance in the oil market and stabilize oil prices. All this may impact very positively on the oil companies’ shares", - Bernstein’s experts believe.  

source: businessinsider.com






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