Saudi Arabia wants Opec+ to deepen oil cuts due to Aramco IPO

02 Dec 2019 / 22:13 H.

DUBAI/LONDON/MOSCOW: Opec and its allies plan to deepen oil cuts and have the deal in place so it runs at least until June 2020 as Saudi Arabia wants to deliver a positive surprise to the market before the listing of Saudi Aramco, two sources familiar with the talks said.

The deal being discussed by the Organization of the Petroleum Exporting Countries and other producers, known as Opec+, would add at least 400,000 barrels per day (bpd) to existing cuts of 1.2 million bpd or 1.2% of global supply.

The current deal runs to March.

“They (the Saudis) want to surprise the market,” one of the sources said.

Another two sources said the latest Opec analysis, drawn up by Opec’s Economic Commission Board (ECB), showed a large oversupply and build up in inventories in the first half of 2020, if no additional cuts were made.

Russia, a key non-Opec ally, has so far opposed deeper cuts or a longer extension. But Moscow has often taken a tough stance before every meeting before approving the policy. Sources said Saudi Arabia was working on convincing Russia.

Riyadh needs high oil prices to balance its budget and support the pricing for the Aramco initial public offering (IPO), which could be the world’s biggest.

Russia, the world’s second biggest oil exporter after Saudi Arabia, also benefits from a higher oil price and has been working with Opec on cuts to prevent an oil glut building as a result of booming production from the United States, which has climbed to become the world's biggest crude producer.

Benchmark Brent oil prices rose by more than 2% to nearly US$62 per barrel today on the news about the possibility of deeper cuts.

Prince Abdulaziz bin Salman heads to Vienna this week for his first Opec meeting as Saudi Arabia’s energy minister.

The IPO will be priced on Thursday, the same day Opec meets in Vienna. The Opec+ grouping holds talks on Friday.

Meanwhile, Institutional investors have put in 144.1 billion riyals (RM160.6 billion) worth of bids for Aramco’s planned IPO, equivalent to more than twice the number of shares on sale, financial advisers for the IPO said today.

The bookbuilding process for allocating shares to institutional buyers – typically asset managers, insurers or pension funds – began on Nov 17 and investors have until Wednesday to place orders. Aramco plans to sell 1.5% of its shares in a deal that could raise up to US$25.6 billion.

The state-owned Saudi oil giant has received subscription orders for around 4.6 billion of shares so far from institutions, Samba Capital, NCB Capital and HSBC Saudi Arabia said.

Although the IPO has received more than enough bids, the level of interest so far is relatively muted compared with other emerging market IPOs, including the listing of a top Saudi bank in 2014 that was oversubscribed many times over.

Aramco has previously said 0.5% of the offering will be allocated to retail investors, leaving 1% – or 2 billion shares – for institutional buyers.

The deal could be the world’s biggest IPO if it tops the US$25 billion listing of China’s Alibaba in 2014.

The lead managers didn’t provide a breakdown of the institutional investors, but in a separate statement last week Samba Capital said the bulk of orders came from Saudi companies and funds, while foreign investors accounted for just 10.5% of the offers as of Nov 28.

The retail tranche, which closed on that date, attracted bids worth 47.4 billion riyals, equivalent to around 1.5 times the number of shares offered.

Riyadh scaled back its original IPO plans, scrapping an international roadshow to focus instead on marketing the offering to wealthy Gulf Arab allies. It has stayed quiet on when or where it might list the stock abroad.

The deal is the centrepiece of Crown Prince Mohammed bin Salman's plans to diversify the Saudi economy away from oil. – Reuters

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