Crude Oil Forecast: Lack of Demand vs ARAMCO IPO

Crude Oil Forecast: Lack of Demand vs ARAMCO IPO

Can Aramco IPO help Oil Prices?

I will try to keep it simple as much as I can:

Let us start with fundamentals:

LACK OF GLOBAL OIL DEMAND

1. Global Oil demand is decreasing. OPEC and IEA lowered their global oil demand forecasts.
2. WTO and IMF lowered their global growth forecasts.
3. US-China trade war adds weight on oil prices.

ARAMCO IPO: How can it impact on the Oil Prices.

Oil prices increased more than 3% with the news that Saudi Arabia is working to have its state oil giant Saudi Aramco list on a stock market as early as at the beginning of 2020, The Wall Street Journal reported on Friday, quoting people close to the talks.

Saudi Aramco, the world’s largest oil company, will hold a public investor-relations call on Monday. Aramco IPO will not be easy. There are questions to be answered in any case.

Saudi Crown Prince Mohammed Bin Salman is insisting on a $2 trillion valuation of oil firm Aramco, even though some bankers and company insiders say the kingdom should trim its target to around $1.5 trillion, industry and banking sources said.

A key factor in an oil company’s value is the expected oil price. Producers including Saudi Arabia, its OPEC colleagues and non-members like Russia have struggled to prop up the market this year by a supply-limiting pact, due to slowing demand and rising supplies from the United States and other producers.

Reuters: 

This year’s bond sale forced Aramco to disclose its financials, revealing a colossal net income of $111 billion, over a third bigger than the combined net income of the five supermajors Exxon Mobil (XOM.N), Royal Dutch/Shell (RDSa.AS), BP (BP.L), Chevron (CVX.N) and Total (TOTF.PA).

Even with such profits, one bank pitching for a role in a renewed listing plan has put Aramco’s value at $1.4-$1.5 trillion including SABIC, a source familiar with the matter said. The source close to Aramco described that as a more realistic valuation.

Oil and gas companies are struggling to attract investor interest due to a weaker outlook for oil and deepening climate activism. The S&P Energy sector.SPNY is up 2 per cent so far this year, underperforming the broader market.SPX which is 15 per cent higher.

Even at $1.5 trillion, Aramco would be worth at least 50 per cent more than the world’s most valuable companies – Microsoft with around $1 trillion, Apple and Amazon at around $900 billion each.

Conclusion:

Near term, ARAMCO IPO talks may send prices higher. Because the Saudi Family would do  “whatever it takes” as noted in Bloomberg. But we know those “whatever it takes” actions could never help a sustainable oil rally.

Another issue which is worth to keep in mind is that cutting supply further into a weakening market could leave Saudi Arabia with lower market share and not necessarily much extra revenue to show for it.

China – Iran Oil Trade:

It is worth to focus on CNBC News:  Brent and WTI price could crash if China buys Iranian oil. Bank of America is warning oil prices could potentially crash by $30 a barrel if China ramps up Iranian crude purchases. The report summarized: Bank of America Merrill Lynch warns the oil price could slip sharply if China buys Iranian oil.
Beijing could undermine Washington’s foreign policy stance by ignoring U.S. sanctions placed on Iran.

My Forecast:

Medium Term: Sideways trading between 50 $ – 60 $. The upside is limited by 60.90$. Daily Closings below 50$ would start afresh sell-off.

Long Term: 27 $ – 40 $

Near Term Technical Overview:

After hitting our near term target 50.78$, Crude Oil prices recovered. This recovery was triggered by the ARAMCO IPO news.

As I posted on the channel, Bearish Bat pattern became validated at 54.83. 53.90, 53.60 and 53.13 are our targets. We need to see H4 closings below 53.13 to speak about bearish continuation.

On the upside, the key resistance level is 56.25. A firm closing above 54.83 would lead the prices towards 56.25 and 57.20.

This week is likely to have volatility due to ARAMCO IPO news.

Now we focus on Bearish Bat pattern and its targets. I will update according to the market’s reaction.

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