Oil price at USD 100/barrel by end of 2018: Saroj Mohapatra
All demand supplies calculations are going wrong in oil market at present. US production is increasing at a good pace and set to topple Saudi comfortably as the world’s largest crude producer and to break its previous record of 10.7 Million bpd very soon, registered way back in 1970. Still the investment banks are moderating their previous estimates northwards. Recently JP Morgan estimated 2018 average oil price at USD 70 per barrel, which is approx. 50% higher than its estimates published just six months before. Goldman Sachs went one step ahead by forecasting the 2018 price at USD 80. These estimates are happening against the backdrop of known news of increased oil production from Kazakhstan and Nigeria offshore and ramp up in Libya and may be Venezuela in 2018. Also nobody expects that the winter across globe will be as cruel as in 2017.
In last article it was discussed that US, Russia, Saudi Arab have a good say in affecting the trend of oil price. They together produce approx. 30 million bpd of oil against total world’s production of 80 million bpd i.e. approx. 40%. Until 6-10 years before Saudi Arab was playing a pivot role in balancing the oil price as a swing producer.
As a swing supplier Saudi Arab was very much successful in limiting the price rise of crude upto good extent despite higher demand from both developed and developing economies. Now from demand side there seem to be no significant boost because of no extraordinary economic growth in China and India. Already the demands in developed countries like EU, Japan, South Korea etc. except US are almost stagnant.
Now let us come to our subject line how higher oil price is the new reality in 2018. We are forgetting about a huge event that was missed in 2017 and set to happen in late 2018. It’s the world’s largest ever IPO of Saudi Aramco. For 5% disinvestment, Saudi Govt expects to earn more than USD 100 billion. Apart from income through IPO, the most important thing is the valuation of Saudia Aramco as a whole which will be calculated after IPO. US has also good existing interests in Saudi Aramco. Even investment bankers will earn directly as a stakeholder of IPO. Indirectly there is a golden opportunity to earn billions through derivative market of oil. As per recent report, hedge funds have increased their bullish position in oil, despite the fact that oil has reached the highest level of 2014. Net long positions have been raised across WTI, Brent, NYMEX, ICE, US gasoline etc. Now the ratio of hedge long position to short position has reached 11.5 against the same ratio of 1.5 in June 2017 i.e just few months back. It shows how bullish the market is but may be in hibernation show J . Last year it seems the said IPO was delayed just because the oil price was low (relative to expectation of Saudi Arab), though other reasons of no-decision of IPO subscription market place whether New York or London exchange were cited.
It is indeed a last opportunity in front of Saudi Arab to earn billions just by selling a small stake in company. This is at a time when big economies like UK, France China have decided to go away from liquid fuel in transportation and industrial sector except petrochemicals (where refined products will be used as feed) by 2030-35. In 2008 when oil touched its peak, Saudi Arab produced around 8.5 Million bpd. Let’s imagine in case now Saudi Arab lowers its production to 8.5 mbpd or even lower, USD 100 per barrel is simply just a cakewalk for Oil.
Saudi Arab’s dynamic, modern-age and powerful crown prince Muhammad Bin Salman estimates the value of Saudi Aramco more than USD 2 Trillion, which is even more than GDP of almost all countries except 5 or 6. Saudi Arab may also try to disinvest more than 5% as an last attempt to have higher earnings. For that Oil need to be shown off to the outside world very bullish.
Therefore it may be concluded that Saudi Arab is in the process of cutting its oil production in a larger volume (against the official published figures) or will cut aggressively in future as against present rate just to ensure oil price is at higher side by the expected timeline of IPO i.e. Oct 2018. It also may have taken the investment bankers into confidence to ensure high over subscription of world’s largest ever IPO possible. The volume of long positions of hedge funds and money managers are probably just indication.
Just tried to put forward the thought on an idle weekend 🙂 along with logic. Lets See what actually happens finally by dawn of 2019.