Saudi Aramco Presses Princes For IPO Investment

Saudi Aramco valuation is going to come in short of the two trillion-dollar valuation
Oil is falling on concerns that the Russians once again will play too hard to get
China was not optimistic about the U.S.-China phase one deal
The Energy Report

The Energy Report

The Phil Flynn Energy Report 



Saudi Slip Up


What is increasingly looking like a failure of the Saudi government to get foreign interest in the Saudi Aramco public offering is making one wonder if they will still have the same incentive to try and support oil prices. Also, oil is falling on concerns that the Russians once again will play too hard to get. Reuters reported that “Russia is unlikely to agree to deepen cuts in oil output at a meeting with fellow exporters next month, but could commit to extending existing curbs to support Saudi Arabia, three sources said on Tuesday.”


Saudi Arabia, in anticipation of the Saudi Aramco launch, has led the way for OPEC plus Russia in securing the best compliance to production cuts in OPEC history. Now after potential investors balked at the high valuation of the Saudi IPO, is it possible that the Saudis will stop over-complying to production cuts. Oil prices sold off after Saudi Arabia canceled its the London leg of its initial public offering roadshow, scheduled for Wednesday. That cancelation may have raised concerns about the upcoming December OPEC meeting. I am sure Crown Prince Mohammad is not very happy and there are even reports of Saudi Officials berating bankers for the failure.


In fact, most of the money in the IPO has been invested by some of the same Saudi princes that got an all-expense-paid vacation at the Saudi Ritz Carlton that shared the same motto as the Hotel California, you could check out anytime you want but you could never leave. Well at least until you paid up. So for foreign investors, it is clear that it is hard to see top dollar valuation when the bulk of your investors had to be strong-armed to invest in the deal in the first place.


Oil also had other concerns, like unnamed sources reporting that China was not optimistic about the U.S.-China phase one deal. Some brought up talk of another increase in U.S. crude supply.


Well if we are going to get that supply increase it is probably going to be helped by a 2.0 million barrel release from the Strategic Petroleum Reserve. That offset reports of a 2.0 million barrel plus drop in Cushing. OK crude supply reported by private forecasters. The key this week will be refinery runs which have disappointed the last few weeks. Also Gulf Coast supply as well as exports. Most believe that U.S. exports are being under-reported on a weekly basis and there is an expectation that this week we may see a big adjustment, but according to Energy Information Administration, it will have no impact on the final oil tally.


Reuters reports that the United States on Monday said it will no longer waive sanctions related to Iran’s Fordow nuclear plant, while armed members of Yemen’s Iran-aligned Houthi movement seized a vessel towing a South Korean rig over the weekend. Protestors in Iraq blocked a commodities port on Tuesday and people took to the streets in Iran to demonstrate against a rise in petrol prices.


Natural gas retreats as the forecast for the December polar plunge changed. Bret Walts at Bamwx reported, "it looks like there was a shift and we decided to warm our forecast in the extended range with the chance of a more mild period to end November and begin December. This is obviously a deviation from our initial idea. The takeaway from the overnight trends is that model volatility will likely continue. However, one of the big reasons we are shifting gears as far as widespread cold chances go is the potential for a minor stratospheric warming event (perhaps evolving into a major event by mid-December) which is displacing the Polar Vortex and sending the coldest air to the other side of the planet. Years that had a similar evolution vary on long-term impacts – but in the short term, we have found research that shows a lack of blocking in the North Pacific and warmer risks in the East-leading up to this type of stratospheric warming event. We still believe a solution like the EPS with cold in the Central and W. The US is plausible with support from some of our analogs, but with warm risks on the E. Coast, heating demand will struggle to surpass 10/30 year normal values."


For natural gas with record production, that cold is needed to sustain a rally. Hence with the warming trend, we have to change course.


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About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.