Aramco IPO delay could drive further crude gains

Oil prices have been stalling around the $70 mark over the past three months, as the benefits of the latest bout of Organisation of the Petroleum Exporting Countries (OPEC) production freezes help maintain relatively elevated crude prices. Over recent years we have seen a clear shift in the dynamic of the oil market, as the rise of US shale has pushed Saudi Arabia into a series of measures to first maintain market share, and more recently conceded that market share to help prop up the price. That decision has been the driving force behind the rise in crude prices over the past six months. The OPEC decision to cut output alongside Russia was the first since 2001, paving the way for further extensions to the deal. This has led to a $20 rise (+43%) in Brent crude over that period. However, while some see the Saudi decision to surrender market share to the US as a response to the fact that the price of oil went into freefall, there is another factor which remains crucial to the story.

Amid a significant hit to Saudi Arabian finances, the decision to sell a portion of the state-run Aramco oil company has raised more than a few eyebrows. To many, there is reason to believe that the transparency required for a stock market listing would put them off completing the listing. However, this initial public offering (IPO) does have the potential to drive a wider diversification, with the $200 billion solar power project alongside Softbank pointing towards a shift in resources away from the oil market. Could this be the beginning of a wider transition away from crude for Saudi Arabia? One thing we know is that any such IPO would be for the money, and with the kingdom seeking top dollar for their cash cow, there is reason to believe that the IPO date will greatly influence the price of crude as a whole. One thing we know is that Saudi Arabia is probably the most influential force in the crude market, and when they tell the other OPEC members to jump, they jump. With Saudi Arabia knowing that the value of the Aramco pay-off is driven by the price of crude and future expectations of where prices are going, it makes sense that crude is elevated ahead of such an event. However, we have already seen a rally up to $70, which could potentially suffice, given that we were looking at $45 per barrel a year ago. However, with Aramco officials hinting that the IPO could be delayed from H2 2018 to 2019, there could be further to run for crude prices, as they seek to drive as much value from their asset as possible.

From a charting perspective, there is a clear hurdle to overcome in the form of the $70-$71 mark, which has been challenged on a number of occasions over the past three years. To the downside, watch out for trendline support as a potential source of further upside. Should we see the price break through the $70-$71 region, this could provide another period of upside for Brent, with precious little resistance above that level. With the most influential player in the crude market having a reason to raise prices over the near term, who would put it past them to push crude higher once more over the coming months?