Often, the simplest explanation is the most likely to be correct.
With an economy geared to fossil fuel production, Saudi Arabia has been running a significant budget deficit in the two years since they intentionally depressed global oil markets. The listing of Aramco is one way to plug the gap in government finances.
This is probably why they’re listing, however, there may also be another motivation.
From Bernstein:
Perhaps Aramco’s growth will be focused on refining and natural gas, but it is possible that Saudi have also realized that demand is likely to run out before supply and it makes more sense to deplete their own reserves ahead of others.
While Bernstein admits this is pure conjecture at this point, “it could have (long term) bearish implications for oil markets” (among other things).
Bernstein’s conclusion:
In the near term however, Saudi will not want to list Aramco at a low oil price. In the run up to 2018, we expect that Saudi will do everything in its power* to ensure oil markets remain balanced and prices stable. This could be positive near term for oil equities.
*Although Saudi’s power is less than it was prior to the advent of hydraulic fracturing, this premise isn’t likely too far off. Oil markets should continue to stabilize and rise further…
At least, for a while.
If you enjoy the content at iBankCoin, please follow us on Twitter
Thanks for this
Is Bernstein implicating the Saudi’s will eventually (after the Aramco IPO) pump as much oil as they can because they believe there will be a point that demand will never be able to match the supply, therefore, the Saudi’s might as well pump as much as they can?
They admit it to be speculation, but that is essentially what Berstein has implied.