SAUDI ARABIA INTERNAL AFFAIRS POINTING TO AN AGREEMENT IN VIENNA NEXT MONTH?

Ahead of a $10 Billion bond issue, Saudi Arabia is warning investors of the challenges that cheap oil poses to its economy. So what is really new? Saudi Arabia is also acknowledging that low price is hurting them as well and this is the big change.

This announcement is the best indicator that the Saudis might be now serious about letting the price of oil to go up and restrict their production which would result into a consensus at the November 30, OPEC meeting.

With low oil price and internal issues, the Kingdom is considering to diversify its path to access cash in going to the public with the intention to raise tens of billions of dollars for the Saudi government through an IPO for Aramco the State oil company.

Even if expected new climate-change regulations don’t come to pass, the International Energy Agency has predicted crude-oil demand growth will slow in the next three decades.

The prolonged period of cheap crude has strained Saudi Arabia’s finances, prompting the government this year to announce ambitious economic overhauls aimed at reducing its dependence on fossil fuels, which were responsible for nearly three-quarters of government revenue in 2015. On the expense side things are not as rosy as they were with a barrel at $100, the kingdom’s vast bureaucracy and the war in Yemen is draining government coffers and creating a budget deficit.

To shore up its finances, the Kingdom is turning to the international bond market for the first time, set to issue debt that bankers expect will exceed $10 billion this month.

In the prospectus sent to investors, the Saudi government outlined that the kingdom’s proven oil reserves, still the bedrock of the economy, stood at 266.5 billion barrels—or 18% of the world’s total—at the end of 2015 and are likely to last another 70 years at the average production levels of about 10.2 million barrels a day last year. The kingdom’s proven gas reserves were 303.3 trillion cubic feet, the fourth-largest of any country.

The kingdom has previously valued Aramco at an estimated $2 to $3 trillion, suggesting Saudi Arabia could raise $100 billion to $150 billion through an initial public offering of 5% of the company’s stock, staggering number.

For Aramco to list on the New York Stock Exchange, it would have to abide by the U.S. Securities and Exchange Commission rules. The SEC will certainly force the Kingdom into a lot of disclosures and transparency that night be interesting for the public but a heavy burden for the Kingdom that has not been used to transparency the “American way”.

Besides Riyadh and New York, Saudi officials have previously said they are also considering a potential listing in London and Hong Kong. Saudi officials are scheduled to meet with investors starting Wednesday in London to gauge appetite for its planned issuance. The roadshow concludes next week in Boston and New York.

In the meantime, speculation on the final November decision of OPEC are in full blown mode. The banking big boys of commodity research are coming down on opposite sides of the street on OPEC’s move toward cutting output.

Goldman Sachs Group says chances of a cut have increased, but still “remain low” Citigroup puts the likelihood of a finalized deal at “well over 50%,” Speculation and volatility are up in a very fragile market. Prices flip-flopped since the announcement last week and we predict that it will be the same until November 30 with a price point between $45 and $50.

Many remains skeptical but we believe that for the reasons explained earlier the Saudis are now ready to make a move. The reality is that the Saudis have a lot to say within OPEC. It is in the interest of everyone to see a balancing act in the oil market and a price oscillating between $45 and $60 is probably a reality for 2017. If OPEC fails to finalize a deal when it meets in Vienna next month, prices could fall to the low $40 a barrel but a reasonable success would push prices up. Citi analysts forecast $65 a barrel by late next year.

Interesting times ahead of us but the combination of the small signs coming from Saudi Arabia and the needs of several of the members is keeping confident that an accord will be reached.