On the rebound

Saudi gives a clue to oil price rebound

When might Saudi Arabia consider letting the oil price rise? Plans to list its state-owned oil producer Saudi Aramco might offer a clue. Mohammed bin Salman - the influential deputy crown prince and driving force behind Aramco's initial public offering - has now said the sale of a small chunk of the company could happen as early as 2017. Although investors would probably pile into such a rare asset anyway, it's reasonable to think the kingdom's rulers would prefer to stage a sale when the oil price is higher than it is today.

Aramco can produce over 12 million barrels per day of crude and has exclusive access to 18 per cent of the world's oil reserves. Its valuation still depends in large part on energy prices, which Saudi as the swing producer heavily influences. Listing even less than five per cent in the company when prices are hovering near 10-year lows makes little sense, especially if Aramco is to be the cornerstone of a new $2-trillion sovereign wealth fund, as the prince told Bloomberg on March 31.

Saudi's rulers have given no indication of giving up the price war. The prince said that Riyadh would only agree to participate in a coordinated production freeze if Iran also played ball. That's unlikely to happen. So it leaves Saudi Arabia unable to cut its production without also losing market share - and leaves the oil price stuck in the doldrums.

But the pain of losing market share might be overstated. Saudi's own demand for oil used in power generation and transport is growing at a rapid clip. Aramco expects domestic demand to reach eight million barrels per day by 2030, almost equal to 80 per cent of current output. Instead of worrying about losing access to customers overseas, the kingdom's bigger problem by then might be supplying enough for the home market. If the Aramco initial public offering really is on course for 2017, and Saudi takes a rational approach to getting a good deal, the outlook for oil just got better.