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SAUDI ARAMCO: temporary balance

SAUDI ARAMCO: temporary balance

Information is not investment advice

Balanced decline

Since its IPO in December 2019, Saudi Aramco’s stock price has been consistently declining. Before the New Year, it traded at $35. But in the second week of March, it was down to $27. After plunging to those levels, it gradually got back to the previously marked descending trajectory. That is how it got to $31 per share and seems well balanced at this level. What’s the status now?

SaudiAramcoH4 2.png

Fundamentals

While competitors such as Exxon freeze their dividends payout, some for the first time in decades, Saudi Aramco cannot afford to do the same. It stays committed to keeping the dividends coming as these have been the main attraction for investors to hold stock in this company – and investors, 98% of whom are Saudi nationals, are now going through one of the toughest financial periods in decades for the Kingdom. People need these dividends; the company needs these dividends. Therefore, Saudi Aramco will fight fiercely to ensure oil prices are high enough to generate them. That may explain the recent decision the company made announcing it would cut the output to 7.5mln of barrels in June – that’s after it was so adamant to keep pumping up to 13mln when the price war with Russia was on a month ago. Partly, that’s exactly what putting bottom to oil prices means in OPEC+ discussions: Saudi Arabia is bound to back it up because it depends on it.

Temporary balance

Excluding the single drop into the negative zone in the middle of April, the base for the WTI price movement in April was $10: that’s when the price was already over, but the oil glut has become more and more apparent. Since the beginning of May, when the first reports about the glut diminishing started appearing in the media, the price started climbing back. Eventually, it established itself a new base at $25 per barrel (for Brent it is at $30). At this level, it went into consolidation, which very likely will keep going during the month until the glut is finally dissolved.  We know for a fact that Saudi Aramco wants to make sure there is no going below the current price level, and the support of $20 will be checking that commitment. When we see the price crossing $29, that would mean Saudi Aramco is getting back to financial capacity.  

WTI_OilH4.png

Stock price scenarios

Saudi Aramco stock price depends on the dividends. If they keep coming, the price per share may stay at $30. If not, the downtrend is likely to continue.

The most interesting question is whether and when the stock price will start climbing. That will be largely defined by the global oil demand when the glut it over, by Saudi Aramco’s financial reports, which will definitely reflect the stronger hit in Q2 2020, and by the strategic perspective for Saudi Arabia.  

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