Trading ranges were narrow, volatility suffered, and liquidity dried up – all the hallmarks of a semi-functional market. There were 541 million bbls of Brent futures that changed hands yesterday. This compares with 784 million bbls on Wednesday or 911 million bbls on Tuesday. Whilst the US was busy giving thanks at home and its president in Afghanistan, life in the rest of the world did not stop. In fact, the US administration still made waves on Thanksgiving by supporting the Hong Kong protesters, a step that irritated China. This is the main reason for the gentle pullback in European and Asian equity prices yesterday although oil managed to post gains across the board.

Tension in Iraq between protesters and government forces are growing as security forces killed more than 40 demonstrators after the Iranian consulate had been torched – geopolitical risk is somewhat on the rise. This morning, however, buyers are taking a break possibly due to two developments. Firstly, the BFOET January loading programme shows a jump of 100,000 bpd on the revised December schedule and is set to be at 998,000 bpd. Secondly, Russia’s November oil production reached 11.24 mbpd, as reported by the Ifax news agency. It is a disappointing 79% compliance. Not much should be read into today’s price action, but a generally upbeat November could easily end on a sour note.

The Aramco IPO

The idea of selling part of Saudi Aramco to private investors was first floated nearly four years ago. The then Deputy Crown Prince Mohammed Bin Salman raised the issue in an interview with The Economist magazine. The rationale behind the idea was to partly finance the Vision 2030 project, which is designed to reduce the Kingdom’s dependence on energy in its attempt to diversify the economy. In April 2016 Saudi Arabia announced its intention to sell-off 5% of its crown jewel and to receive at least $100 billion for the sale. It would effectively value Aramco at a mind boggling $2 trillion.

Almost a year later the company’s chief executive announced plans to list on the domestic Tadawul exchange as well as internationally in 2H 2018. As keeping this original deadline became increasingly unlikely Aramco decided to buy a stake in the country’s largest petrochemical company, SABIC. The original plan for the IPO was then put on hold in August 2018 and the floatation was pushed out to “within two years”.

In April this year the company revealed that its earning was a staggering $224 billion in 2018. It was a necessary step as Aramco was planning to tap the international bond market. A week later Aramco sold $12 billion bonds with demand exceeding supply more than eightfold. The oversubscription was deemed a good sign before the planned IPO. In August a New York IPO was considered too risky. Energy minister Khalid al-Falih was replaced by the head of the country’s SWF as the chairman of Aramco and removed as minister a few days later. The new plan was to list 1% of the company on the Tadawul exchange this year and another 1% in 2020.

In the middle of the September a drone attack on oil facilities forced the company to shut down half of its production. It caused an obvious set-back for the IPO but Aramco restored output impressively within a few days.

Due to security concerns, however, Aramco’s credit rating was downgraded by one notch. In the middle of October, the launch was delayed once again. Due to lukewarm international interest roadshows in the US, Europe and Asia were abandoned. Instead the Kingdom started to market Aramco shares domestically and within its Gulf allies. Orders are expected to flow in until December 4, price to be announced the following day and trading to start probably a week later. The intention is to sell 0.5% of the shares to local retail investors offering them bonus share schemes if they keep the stocks for a longer period. The remaining 1% of the package is to be sold to institutional investors in the region.

The current valuation is between 30 riyals and 32 riyals, which would value the company $1.6-$1.7 trillion, well below the original target of $2 trillion. Some says that even this range is on the high side as pressure on domestic investors inflates the share price. Latest reports say that retail subscription reached 32.57 billion riyals by Thursday. It is the equivalent of $8.7 billion and equates to one-third of the total package. The retail side of the IPO has been fully covered. The company is aiming to raise at least $25.6 billion for the 1.5%. Abu Dhabi is reportedly planning to invest anywhere between $1 and $2 billion. The Kingdom is also trying to secure commitment from the Kuwaiti SWF. As institutional interest does not spread over the Persian Gulf the potential investments from the neighbouring countries look more like political rather than business decisions.

As the timeline above suggests the current state of the floatation diverges greatly from the original ambitions thus raises several questions. In the light of the September attack on oil installations is it a safe investment to put money into Aramco? Looking at the broader picture and the lukewarm interest from international investors is investing in fossil fuel companies doomed forever as focus is shifting towards zero carbon and renewable energy? Last but not least, will the Kingdom decide or be forced to change its approach to market management in the light of the IPO (especially in case an international flotation becomes reality in the future) and if the answer is yes would it mean the end of OPEC? Speculation will be rife when trying to address these questions but only time will give the ultimate answers