THE END OF THE UMNO CASH COW: IN JUST 6 TO 8 YEARS, OIL COULD CRASH TO US$10

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Russia’s Finance Minister Anton Siluanov has revealed that after the global crude oil meltdown, Kremlin is ready for reality. As one of the world’s largest producers of crude oil, Russia was badly hit when the oil prices plunged in 2014. Russian ruble lost more than 120% against the American dollar in July 2014 alone. And the oil prices have yet to recover after 3 years since the “Oil Armageddon”.

To be prudent, Russia has adjusted its latest budget based on crude oil of US$40 a barrel. What this means is in the short term, the commodity is unlikely to go up higher than US$60 a barrel. But even at US$40 a barrel, some analysts think the number is too optimistic, predicting instead that the prices could go lower. The present US$52 (WTI) price is due to production cut by OPEC and Russia.

Lately, investors, analysts and speculators have been raising questions about Saudi Arabia’s Aramco IPO. You see, Saudi is still in deep shit since the crude oil collapse in 2014. The kingdom is still burning its reserves like crazy to stay alive. Their foreign exchange reserves stood at US$494 billion in July, down from US$744 billion in September 2014.

In other words, the Kingdom of Saudi Arabia has literally burnt a third (33%) of their reserves within 34 months since September 2014. That’s about US$7.3 billion of reserves burnt – every month – for the last 34 months. In fact, Saudi is now reduced to borrowings in order to slow the rate of its reserves being burnt. Last month, it sold US$12.5 billion international bond.

The sale in September 2017 was its 3rd sale in the international debt markets, after its 2nd sale last year’s of US$17.5 billion bond (then the largest by an emerging market), and a US$9 billion sukuk, or Islamic bond, in April. What this means is Saudi has actually burnt US$250 billion of foreign exchange reserves plus US$39 billion of debts – a total of US$289 billion.

Rubbing salt into injury, Saudi Aramco officials are now not too sure if they should proceed with the massive public offering. Financial Times has leaked that Saudi Aramco is frustrated over the weak oil prices, so much so that they are considering shelving the IPO – either London or New York stock exchange – entirely. Saudi is considering selling shares privately instead of listing them publicly.

One of the prospect private customers is to a foreign government – China. Saudi Aramco hopes to get a premium when they sell the bulk of the shares privately to China. However, the Chinese, already taking advantage of the weak oil prices by stockpiling its storage tanks as part of its SPR (Strategic Petroleum Reserve), is expected to play hard to get.

According to Orbital and JPMorgan, China’s SPR was a whopping 600 million barrels as of May and was estimated to breach 700 million barrels by September. If Saudi Aramco wishes to sell at a premium, China has the deep pocket to purchase them but the Chinese might use the opportunity to “force”Saudi to accept the deal only in Yuan, instead of US dollar.

With foreign exchange reserves at US$3.09 trillion, China is one of very few foreign governments which could pay premium for a strategic stake in Saudi Aramco. Still, beggars can’t be choosers; hence Saudi doesn’t seem to have the bargaining chips here. Of course, China also knew that the longer Saudi drags on the IPO, the worse it would be for the Arabs.

Unless Saudi and Russia could cut the production in a meaningful way to boost the crude oil prices while at the same time able to convince American shale producers not to ramp up production, which is absolutely unlikely, Saudi Aramco does not have the luxury of time. And in just 6 to 8 years, the global oil prices could crash to merely US$10 per barrel.

Chris Watling, CEO of Longview Economics, claims that such ridiculous price – 10 bucks a barrel – is possible as alternative energy fuels continue to attract more and more investors. That’s because 70% of oil are currently being used for transportation. A paradigm shift of internal-combustion engines to electric vehicles would therefore slash a huge demand for oil.

Mr. Watling has only 1 advice for Saudi Aramco – sell its IPO (most likely in the 2nd half of 2018) quickly before oil goes to US$10 a barrel. If Saudi is in the business of hoping that oil prices could perform better next year, they can forget it. Last Thursday, the International Energy Agency (IEA) said the global outlook for oil markets in 2018 could put a dampener on hopes for higher prices.

The IEA’s latest monthly report was published amid optimistic forecasts from the major oil producer group OPEC, with the cartel arguing there was evidence of the global oil market rebalancing following several years of low prices. Those looking for higher prices are simply day dreaming because they’re fighting against global stock build-ups, static oil demand and electric cars.

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