The Company’s shares began trading on the Tadawul stock exchange on 11 December 2019. The shares rose to 35.2 riyals, giving it a $1.88 trillion market capitalization, and reached the $2 trillion mark on the second day of trading.

Global Positioning

Being a major supplier of oil globally, the company holds a special value in the global supply market. Hence, disruptions in the production process or any other hindrance impacts the global economy as a whole. Saudi Aramco has been attacked twice in the last decade. The 2012 cyber-attack involved several computer systems of the company being hacked. Yet again in 2019, another event took place.

Saudi pipelines, oil installations, and tankers had occasionally been attacked over the past two years, but analysts say what happened in eastern Saudi Arabia in the early hours of Saturday morning is a much larger escalation: a hit to the jugular of the kingdom’s oil industry. At 3.31 am and 3.42 am on Saturday, loud explosions erupted at Khurais oilfield and Abqaiq processing facility, both owned by Saudi Aramco, the country’s state-owned oil company, often described as the kingdom’s crown jewel. The explosions set off fires that took several hours to douse and appear to have caused significant damage. Saudi oil ministry sources said the production had been disrupted by about 5m barrels a day – nearly half the kingdom’s estimated output of 9.7m barrels and 5% of global production.

Economic Implication

Saudi Aramco lost on its a huge portion of crude oil supplies due to the attacks. Eventually, the supply side of the oil market’s demand-supply mechanism changed. With limited oil refining and other activities, the supply decreased keeping the demand the same or slightly increased. These actions led to a new equilibrium where the prices of oil surged with a rise in the stock prices. Eventually, the stocks became overvalued shaking the financial markets with the soaring high prices of oil. The price of a Brent oil rose to almost $72 (£58, up from $60 an oil) by 20 percent early on Monday. That’s a massive jump — the biggest step since the 1980s contract was established.

It then fell down to around $66 a barrel after Donald Trump vowed to unleash some of America’s oil reserves, to make up for Saudi Arabia’s deficit. That’s a two-month record, 10 percent more than Friday night.  Higher oil prices have the potential to pull global growth. It pushes up transportation costs and petroleum-based goods prices. That fuels inflation, leaving less disposable income for consumers.

With appropriate measures and repairs, the oil supply was brought back to normal.

Impact of COVID & Price War with Russia on Oil Prices

With the advent of COVID-19, Saudi Aramco has faced another challenge with profits plunging more than 50% than expected in the first and second quarters. To understand the impact, we again need to consider the demand and supply mechanism. The major demand for oil is from the transportation sectors, business closures, domestic and international travel that kept on declining due to lockdown. This immensely declined the demand, shifting it inwards. A sharp decline in domestic consumption and a possible decline in new investments, declines in tourism and business travel, the spillover of weaker demand to other sectors and economies through trade and production linkages, supply-side disruptions to production and trade, and shifts in healthcare expenditure are just some of the channels through which the pandemic affects the demand side in the market.

Responding to this, Saudi Arabia decided to reduce the supply of oil so as to keep the prices at a moderate level. The proposal was although refused by the Russian’s and what followed was a price war. Saudi Arabia entered a price war with Russia on 8 March 2020, encouraging a 65 percent quarterly decline in oil prices. In the first few weeks of March, US oil prices plummeted by 34 percent, crude oil dropped by 26 percent, and Brent oil dropped by 24 percent. In the aftermath of the COVID-19 pandemic, the price war was caused by a break-up in the dialogue between the (OPEC) and Russia over potential cutbacks in oil supply. Russia walked out of the agreement and the OPEC alliance collapsed. Oil prices had already declined by 30% due to the reduced demand, but with the price war, the result came out to be a global stock market crash.

Saudi Arabia and Russia agreed to slash oil supply in early April 2020, and again in June 2020. On April 20, the price became negative. It should be noted that oil production can be slowed down but not totally halted, and even the lowest possible level of production resulted in higher supply than demand; those holding oil futures became willing to pay to offload contracts for oil they expected to be unable to store.

Current Scenario and Investment Prospects

Lockdowns were lifted in some of the countries including Saudi Arabia in June along with a set of instructions to be considered and followed. Thus Saudi Aramco has seen considerable growth after the oil price crash and managed to earn considerable profits but less than expected. As a result, Saudi Aramco has been reviewing its plans to expand at home and abroad in the face of sharply low oil prices and a heavy dividend burden.

One of the projects that are likely to face the axe or the pause button from the oil major may be its proposed investment in a $44 billion mega refinery project at Ratnagiri in Maharashtra. It is a 50:50 partnership between state-run Indian oil companies and Aramco. It would either exit the investment or would review it again once the market improves, putting it at a halt for the time being. However, Sources said Aramco has already made its stance known on refinery investments in China and a Texas, USA factory. It is also slowing on its planned investments in Pakistan. In India too, the privatization proposal for state-owned refiner BPCL has been delayed by three times so far, in the absence of any firm investment pledge from Saudi Aramco and other investors.

However, it is still working on the $15 billion stakes in Reliance Industries Ltd.’s refining and chemicals business, although lower oil prices are forcing it to slash investment spending. A deal with Reliance would help Aramco join the ranks of top oil refiners and chemical manufacturers. Aramco is already a major crude supplier to India while Reliance sells petroleum products to the kingdom, including gasoline.  The Reliance transaction will help Aramco achieve its target of more than doubling its refining capacity to between 8 million and 10 million barrels per day; At the end of last year, the Saudi corporation had a refining capacity of 3.6 million barrels per day, including wholly-owned plants and joint venture holdings. The gross capacity of the facilities with stakes in Aramco was 6.4 million barrels per day.

State oil company Saudi Aramco has discovered two new oil and gas fields in the northern regions, the kingdom’s energy minister said on Sunday, state news agency SPA reported. The fields haven’t been pinpointed as of now but are already producing oil, condensates, and gas. The two new fields have the potential to contribute to its non-hydrocarbon oil. The Kingdom has been striving for the same as an important aspect of its diversification efforts. A lot of the oil provided by Aramco is used locally for power production, and the business — and the government — are trying to minimize this by replacing gas oil. Moreover, this would also ensure that oil is freed up for exports, leading to an even better dominance over other nations as well.

Conclusion

The Saudi Arabian Oil Company plays an integral part in the world economy as a major supplier and producer of petroleum and its products, natural gas, and crude oil. Amongst many other companies and even countries, Aramco seems to have stabilized quite well considering the aftermath of several incidents that completely changed the market scenario. Moreover, Saudi Arabia relies heavily on its oil and petroleum industries as they are a major source of their income. Hence, how Aramco performs reflects directly on the country’s economy.

Despite the concerns regarding the oil market, analysts predicted that Aramco was better prepared to weather market volatility, owing to its size and scale, its low production cost, and solid free cash flow generation in a weak oil price environment. This is good news for its investment plan for Asia.

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Oil Price War Explained

Well, it all started with the Russia-Saudi oil price war 2020. Behind this was an effective collapse of an agreement between OPEC and Russia to enact production cuts to support the market. Saudi Arabia, OPEC’s de facto leader, wanted deeper and more prolonged cuts to counter the effect of the spread of coronavirus on demand. The International energy agency said that oil consumption is expected to contract this year by 1.5 million barrels per day for the first time since 2009.

Despite this Russia refused the OPEC decision, believing the bigger cuts in production would only propel rival US shale producers. In response, on 8 March 2020, Saudi Arabia launched an oil price war after Russia deal to collapse. Even as the world requires less oil from global producers, the kingdom said it would put 2.6 million barrels a day into the oil market. This triggered a tit-for-tat response from rivals. Russia said it would add more oil into the market and so did the UAE. The UAE announced an increase in production to 4 million barrels per day, higher than the country’s estimated output capacity of 3.5 million bpd.

Aftermath

It’s the first time since the 1930s that we’re seeing such a severe demand shock now combined with a supply shock facilitating  65% quarterly fall in the price of oil. Since the beginning of the price war consumption fell drastically due to depressed demand and insufficient storage mainly because of coronavirus pandemic.

Saudi Aramco announced a cut in capital expenditures from $35–40 billion planned to $25–30 billion. Iraqi and Kuwaiti oil producers also announced price discounts to their buyers, though Iraq’s discount was lower than that of Saudi Arabia’s. The US-based company, Whiting Petroleum Corporation, which produced 120,000 barrels per day, was the first major producer to declare bankruptcy due to the oil price crash. The oil price war is one of the major causes and effects of the currently ongoing global stock-market crash. Norway, Europe’s largest oil exporter, saw a drop in its currency to historic lows against the Euro (source).

In terms of India…

World Bank says Remittances will plunge by more $100bn. This will bite hard as FDI is set to fall 35%, equity & debt flows are expected to fall 80% to low and middle-income countries. India will be hit too especially with flows from the Gulf drying up. India’s remittances are estimated to fall ~23% to $64 bn in 2020.

However, in Russia Saudi oil price war, India can be a big winner by taking advantage of the fall in oil prices and can stock its reserves. India has a storage capacity of 39 million barrels, China’s total capacity is at 550 million barrels and Japan’s at 528 million barrels, ensuring a supply of over 190 days in the event of a supply disruption. If India can increase its storage capacity, then it can be a very good deal for India. 

One more advantage Indian Markets can demonstrate i.e, in the area of Bonds. Still, compared to the Global Markets, Bond yield in India is comparatively attractive. With TLTRO 2.0, Corporates like RIL, NHPC have started issuing bonds. This can be an attractive opportunity for FIIs to capitalize.

On 9 April, OPEC and Russia’s historic deal marks the end of the oil price war by agreeing to reduce the oil production by 10 million BPD to boost the price and let the market forces get stable.

In future, the crude oil prices are expected to make more new lows as long as this global pandemic continues.

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