In search of equilibrium: how world oil prices could change before the end of the year

On Monday, November 18, world oil prices show mixed dynamics during global trading. At the beginning of the day, the cost of raw materials of the Brent reference brand increased by 0.3% to $ 63.5 per barrel, after which it decreased to $ 62.7. This is evidenced by the ICE exchange in London.

Oil quotes fluctuate after a record increase in recent days. So, in previous trading on November 15, the Brent barrel went up to $ 63.6. The value has become the highest since the end of September.

As Artyom Deyev, head of the AMarkets analytical department, explained in an interview with RT, at present the oil market players are counting on the imminent end of the US tariff war with China. Thus, the possibility of signing a trade agreement between the two countries supports commodity quotes.

“The process of concluding a trade deal between the US and China is now a determining factor for the cost of a barrel. Amid a slowdown in the global economy, the successful results of negotiations between Beijing and Washington will be able to give the necessary impetus and stimulate demand for oil. This, in turn, will lead to an increase in oil prices, ”said Deev.

On November 16, representatives of the United States and China discussed over the telephone the first part of the trade transaction and "agreed to maintain close contact." This is stated in a statement by the Ministry of Commerce of China. At the same time, earlier during a speech at the New York Economic Club, Donald Trump announced the possibility of signing an agreement in the near future.

Recall that in 2018, the United States unleashed a trade war with China. The States accused China of illegally acquiring American technology and increased duties on Chinese goods imported into the country. Beijing has introduced a response. After a series of negotiations in May 2019, Washington went on to aggravate the conflict: in addition to introducing new duties, American technology companies began to stop cooperation with Huawei. In August, the countries again failed to compromise on the terms of the trade deal and introduced new mutual restrictions in September.

“The fall in oil prices from April to September 2019 from $ 75 to $ 56 per barrel was mainly associated with the risks of an escalation of trade wars and a slowdown in the development of the largest economies in the world. Therefore, reports of recent weeks about the proximity of the signing of the transaction and even the possible cancellation of previously introduced mutual increased duties are encouraging in the market of risky assets and oil, ”Mark Goikhman, head of the CFT analyst group, said in an interview with RT.

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Giant exit

According to analysts, additional support for oil prices is provided by news about the planned entry into the stock market of the Saudi state corporation Saudi Aramco. By the end of the year, the largest oil company in the world may conduct its first public offering (IPO) on the Tadawul Saudi Arabian Stock Exchange.

On November 17, Saudi Aramco announced its intention to sell 1.5% of its securities during the IPO. According to the company, the cost of one share will be about $ 8-8.53. The final price will be announced on December 5th.

“Market players understand that before the IPO, Saudi Arabia will do everything to maximize oil prices. The placement of securities will take place on the eve of the meeting of the OPEC + transaction member countries, where measures to maintain oil quotes will be discussed. There is a high probability that the parties to the agreement will extend the agreement on the restriction of production. Both the OPEC leadership and the Saudis themselves are preparing the market for this, ”said Mark Goichman.

According to Saudi Aramco, the registered capital of the company consists of 200 billion shares. Thus, the total value of the company is estimated at $ 1.6-1.71 trillion, and about 3 billion securities worth $ 24-25.6 billion will be put up for auction.

Note that the cost of Saudi Aramco significantly exceeds the performance of the most expensive companies in the global stock market. For comparison: at the moment, Apple has a market value of $ 1.18 trillion, Microsoft - $ 1.14 trillion, Alphabet - $ 920 billion, Amazon - $ 862 billion. These data are provided by the NASDAQ exchange.

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For the first time, the IPO Saudi Aramco idea was proposed in 2016 and became one of the main points of the Saudi Arabia reform program “Vision 2030”. The strategy is aimed at changing the structure of the economy and reducing the kingdom's dependence on oil. According to experts, the implementation of the plans requires large budget injections. The authorities are planning to attract a significant part of these investments through the sale of shares in Saudi Aramco.

“The main goal of the IPO is to attract investment in the Saudi Arabian market and raise the level of the Tadawul stock exchange against the background of other world financial platforms. Such a step will increase the desire of investors to invest more actively in the Saudi market. Thus, the country's government will be able to carry out the necessary diversification of the economy in order to rid the country of oil dependence, ”explained economic analyst Ahmad Yasin in an interview with RT.

Weak drilling

A positive factor for oil prices, analysts also consider a marked decrease in drilling activity in the United States. From November 8 to 15, the number of drilling rigs in the United States fell immediately by 10 units - up to 674 units. According to the oil service company Baker Hughes, the value was the lowest since April 2017.

It is noteworthy that the number of drilling rigs has been declining for the fourth week in a row. Such statistics traditionally signal investors a decline in global oil supply and cause price increases.

“The reduction in drilling rigs is due to the expected slowdown in oil demand growth in 2020, as well as the limited pipeline capacity in the United States. Existing oil pipelines were not able to pass the increased volumes of oil amid rising production in 2017-2018. That is why shale companies stopped developing new wells and focused on existing ones, ”said Vyacheslav Abramov, director of the BCS Broker sales office, in an interview with RT.

At the same time, US oil production is still growing. According to the latest data from the US Department of Energy, over the past week, energy production in the United States increased by 200 thousand barrels per day to 12.8 million barrels per day. As noted by Abramov, the observed dynamics restrains further growth in oil prices.

Waiting for December

According to Artyom Deyev, in the near future, oil prices will continue to remain in the range of $ 61-63 per barrel. According to Mark Goichmann, a noticeable increase in quotations may occur in December. According to the expert, the dynamics will depend on negotiations between China and the United States, as well as the outcome of the OPEC + meeting.

“December may be decisive for oil prices. If Beijing and Washington sign a trade agreement and OPEC + members extend their contract, the cost of a barrel of Brent could rise to $ 66 or more. Otherwise, there are risks of lower prices in the region of $ 58-60, ”said Mark Goikhman.

If China and the United States again fail to agree on the terms of a trade deal, and oil prices begin to decline, the OPEC + member countries may further reduce energy production. So, the supply of hydrocarbons in the world will begin to decline, and quotes will begin to grow. This was told in an interview with RT by the head of the analytical research department of the Higher School of Financial Management, Mikhail Kogan.

“For the sake of a successful Saudi Aramco IPO, Saudi authorities can insist on the expansion of existing OPEC + oil production restrictions of 1.2 million barrels per day in order to maintain oil prices,” the expert said.