This article is the first of a series which will explain why I think oil will be back to $70-$80 by end of 2018.

(Very different approach and not incoherent with Oil Trading – Oil is going down on the medium term. (Q1 2017) – Fundamentals, Sentiment and Price Action Analysis)

This one is about the “will” of the big players or, as you can say, political reasons 

The second will be on fundamentals and the third will summarize my position and explain how I plan to profit from it.

  • (1) Big players want it up
  • (2) Aramco IPO and the Power of Saudi Arabia

(1) Big players want it up 

Below an “old” graph from September 2015 which shows: the share in oil production, the break-even oil prices needed for each country to balance its budget and the financial reserves of each countries.

I choose to use a chart from 2015 because I think the break-even oil price is still very relevant – showing  the “normal” goal of each country before the huge drop in prices we experienced.

break.png

Oil price on September 23 2015 was around $49, just a little below current level.

As you can see, except Russia and maybe Kuwait, nobody among the biggest producers is balancing its budget.

This is the kind of incentives that could have help arrive to the conclusion that OPEC would announce a production cut deal last November.

When major market participants want something, and this is especially true in the oil market, history shows us that they usually succeed (see slash in output during the 2008 financial crisis and the huge recovery following).

When OPEC does announce – and adhere – to production cuts, crude prices rise.

Opec cut and gains.jpg


(2) Aramco IPO and the Power of Saudi Arabia

The one and biggest incentive for Saudi Arabia: the incoming Aramco IPO

It will be a fantastic indicator to anticipate how Saudi Arabia manages its production policy going forward.

As we saw with the OPEC deal and the record compliance (120% for Saudi Arabia) – they are willing to commit and make huge efforts (deal with Iran- the archival!)  to succeed in their IPO.

  • What does it mean for oil prices?

Saudi Arabia needs oil prices in the $70-$80 range to reach the desired $2 trillion valuation.

The IPO is likely to occur in 2018-2019, which means that at that time they need:

-oil trading in this range

-public sentiment toward investing in oil companies

  • How could they do it? 

Keep in mind Saudi Arabia is a big regional power, an allied from the US, a states that has contracts with numerous companies (energy, banks, industrial, defense..) worth billions of dollars .

They have different tools at their disposal to increase oil prices:

Saudi Sate: announcements, position, influence and action.

Ranging from simple declaration to aggressive cuts.

OPEC: announcement, position, influence and action.

Ranging from simple declaration to aggressive cuts.

-Big banks and institutions participating in the IPO will certainly have a “nice” and biased vision of the oil market – driving sentiment higher at the right time.

Ranging from reports to direct intervention in the market.