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Saudi Arabia has been threatening to list Aramco, the state-owned oil company, for ages.
The IPO (initial public offering) is said to be brewing on an annual basis (it’s a hardy perennial in the “IPO watch” section of MoneyWeek magazine). But the timing has never been quite right.
However, Saudi leader Crown Prince Mohammed bin Salman is clearly fed up of waiting.
And that could have implications, not just for the oil price, but for the wider investment outlook.
Saudi Arabia is keen to sell off its state-owned oil company
How do we know that the Saudi boss is getting tired of waiting for the Aramco IPO?
Because he’s just unceremoniously replaced Khalid al-Falih as energy minister with one of his half-brothers, Prince Abdulaziz bin Salman. Falih has also lost his place as chairman of Aramco – being replaced by the head of Saudi Arabia’s sovereign wealth fund.
Flogging off Aramco is a key part of the prince’s “Vision 2030” plan. As the FT points out, he needs the money to fund the change of direction, and floating Aramco also gives credibility to the idea that he’s trying to move the economy away from its dependence on oil.
One of the other things standing in the way of the IPO has been the fact that the prince wants to raise a huge amount of money, which would require the whole of Aramco to be valued at around $2trn. Given the ups and downs in the oil price, it hasn’t been entirely clear how that would be achieved.
But it appears that he’s decided that it’s time to give it a go, one way or the other.
It has helped that last year’s debut bond issue from Aramco “was massively oversubscribed”, notes the FT. In our brave new world of socially aware, ESG investing, it took the world’s most powerful global investors the best part of a handful of months to get over the fact that a high-profile journalist had been brutally murdered, and that they were funding the world’s biggest producer of fossil fuels. Ain’t ethical investing great?
Anyway – the high level of demand for the bonds suggests the appetite is there, and the boss wants to get this company listed. So he’s got rid of a guy who wasn’t quite enthusiastic enough.
That suggests that Saudi Arabia will also go out of its way to keep oil prices on the high side. That’s why the new energy minister has been keen to point out that Saudi Arabia is going to maintain production cuts in conjunction with oil cartel Opec and Russia. One analyst tells the FT that this probably means an oil price of at least “in the high $70s”.
Now just because the Saudis want a higher oil price, doesn’t mean they’ll get it. But combine a Saudi government that is fixated on getting the Aramco listing away at a decent price, along with an already tight supply and demand picture, plus a global economy that isn’t quite as weak as markets appear to think, and you could have a recipe for oil surprising on the upside.
Why a rising oil price could catch the market off guard
What are the wider implications? As James Ferguson of the Macro Strategy Partnership points out, markets are currently pricing in a “chronic and inescapable disinflationary trap”. And yet, inflation is not particularly weak right now, especially compared to the last time we saw bond yields sliding into negative territory en masse, in 2015-2016.
In the UK, it’s sitting around the target level at around 2.1% (using the consumer price index, or CPI measure). In the US, it’s not far off that. And even in the eurozone, the area most at risk of deflation, it’s still around 1%.
How do we know where inflation might go next? Interestingly, wage growth – which central bankers pay close attention to – is not particularly closely related to wider consumer price inflation, notes Ferguson.
Instead, for a variety of reasons that I won’t go into in depth here, if you look at movements in gold and oil prices, and combine them in an equally-weighted basket, then the resulting chart tracks the US inflation rate surprisingly closely.
In other words, if oil and gold are both going up, then chances are inflation is heading higher too. And if that’s the case, then it’s very hard to justify bond prices where they are today.
It’s something to watch out for. In the meantime, I certainly wouldn’t be in any hurry to sell out of your oil stocks.
Oh by the way, you’ll be glad to hear that James is speaking at our Wealth Summit on 22 November. He’s one of the most thought-provoking analysts I know, so make sure you don’t miss out. Get your ticket here.