Schachter’s Eye on Energy: Saudi Arabia Announces Production Cut to Make ARAMCO IPO a Success

Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 32 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe. 

The price of crude oil is holding around US$59/b as Saudi Arabia cuts production by 400Kb/day and OPEC as a whole by 500Kb/day. This has ensured a successful offering of ARAMCO shares. The ARAMCO shares were priced at 32 Riyals or US $8.53/share valuing the company at 1.7 trillion US dollars. The IPO raised Saudi Arabia US 25.6 billion dollars, the largest underwriting in history so far. This announcement by OPEC has caused significant short covering and the price of crude lifted US$3/b last week. 

EIA DATA: The EIA data last week was seen as positive by the street. The key bullish piece was commercial stocks which fell 4.9Mb above the 2.4Mb decline expected. However two key numbers did not get attention. The first was that gasoline inventories rose by 3.4Mb and that distillate inventories rose by 3.1Mb. So overall product inventories rose by 6.5Mb; or much more than the commercial crude decline. The reason for these two builds was that refinery utilization rose to 91.9% from 89.3% on the week. 

CONCLUSION: Saudi Arabia has played the ARAMCO IPO very well and had demand for twice the number of shares that were offered and received at the high end of the price range. The current euphoria may not last more than a few more days. While Saudi Arabia may cut production, other countries like Russia and Iraq have been known to produce in excess of their quotas. In addition, this is only a deal until the end of March and not June as the market expected. We see crude prices backing off starting next week and for WTI to retreat to the low US$50s. The prior expectation of a breach of US$50/b during December is now less likely given recent Saudi moves. 

Tax loss selling season is underway and the worst of the pressure should come over the next two to three weeks. We will send out Action Alerts to subscribers when this window is most opportune to take advantage of extremely attractive pricing.

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