Why OPEC Plans Oil Cuts Into 2018: Aramco’s Coming IPO
Big producers in Vienna are edging toward agreement for nine-month extension
VIENNA—Saudi Arabia is pushing the OPEC oil cartel and other big producers gathered here this week to extend crude production cuts for another nine months. The reason: the timing of the blockbuster IPO of Saudi Arabian Oil Co., people familiar with the matter said.
The Saudis want higher oil prices well into 2018 to support the initial public offering of their state-owned oil company, Aramco, people familiar with the matter said. The initial offering of 5% of the company is being timed for some time in 2018 and has been billed as the biggest ever, with valuations reaching over $2 trillion.
But the IPO’s value will in large part be determined by the price of oil, which has yet to recover fully from the 2014 price crash.
Here in Vienna, national oil ministers from OPEC 13 countries began arriving Tuesday and said they were on board with the Saudi plan for a nine-month extension of production cuts agreed to last December. That six-month agreement between OPEC and 11 heavyweight producers outside the cartel was meant to drain 2% of global oil production from the market and start bringing supply back in line with demand.
Ecuadorean Energy Minister Carlos Perez said most OPEC members support a nine-month extension of cuts at current levels of about 1.8 million barrels a day. Russia, the largest of the non-OPEC producers in the agreement, has said it supports a nine-month extension.
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The ministers meet on Thursday to decide.
“We will support the majority,” Mr. Perez said.
The price of Brent crude, the international oil benchmark, rose for the fifth straight day Tuesday, going up 0.2% to $53.96 on optimism about a new production deal.
The Saudis have been trying to push oil higher since January 2016, when prices hit a 12-year low of less than $28 a barrel. Earlier that month, Saudi Deputy Crown Prince Mohammed bin Salman had announced the IPO.
Saudi officials say they want to get oil prices above $60 a barrel. In reality, they need oil prices much higher to balance their war-strained budget, to as much as $80 this year and $75 next year, said Bjarne Schieldrop, analyst at Sweden’s SEB bank.
“It’s hugely important for Mohammed bin Salman,” Mr. Schieldrop said. “He cannot slip now. He needs the IPO to be successful as he has a lot at stake.
“An oil price of $50 will not do it in the longer term,” he added.
Russia issued a rare joint statement with Saudi Arabia calling for a nine-month extension last week. Russian President Vladimir Putin is heading into an election in 2018 with a budget strained by low oil prices, said Robert McNally, president of energy consultancy The Rapidan Group.
“If they abandoned their restraint and returned to an all-out market share policy, prices would plunge into the $30s,” Mr. McNally said.
Brent crude will average $57 a barrel this year, reaching $60 in the fourth quarter, according to a poll of 14 investment banks surveyed by The Wall Street Journal in late April. The banks in the Journal survey expect Brent to rise to an average of $62 a barrel next year and $65 a barrel in 2019.
A nine-month agreement would be unusual for OPEC, which generally meets twice a year and makes agreements that last six months.
In addition to helping the Aramco IPO, a longer agreement would reassure the oil market that OPEC is committed to supporting prices. A nine-month agreement would keep OPEC output contained during 2018’s winter months, when demand for crude traditionally declines.
Saudi Arabia is OPEC’s most influential member, but it doesn’t always get what it wants. In 2011, Saudi Arabia wanted OPEC to agree to raise its output to make up for Libyan outages. It was thwarted by Iran, which wanted the higher prices caused by Libyan-related shortages.
Then Saudi Oil Minister Ali al-Naimi stormed out, calling it the “worst meeting.”
Pushing production cuts to help the Aramco IPO is a delicate matter for Saudi Arabia. Not all countries will want to cut output at a time of recovering prices to help the Saudi’s public listing.
Iraqi officials have already balked at the idea of a nine-month agreement, sending Saudi Energy Minister Khalid al-Falih on an emergency trip to Baghdad Monday to bring them on board.
OPEC is considering three proposals when it meets on Thursday: renewing its agreement for six months, nine months or one year, people familiar with the matter said Tuesday.
