Saudis Make Surprise Oil Cut With Eye on $2 Trillion Aramco

(Bloomberg) -- Saudi Arabia surprised the oil market with deeper production cuts, sending crude prices soaring and predicting that Aramco, fresh from its initial public offering, will soon surge past the elusive $2 trillion valuation.

After two days of grueling talks in Vienna that had focused on adjusting the OPEC+ quota and redistributing output cuts more equitably, Energy Minister Prince Abdulaziz bin Salman sent prices soaring with the promise to take the kingdom’s production down to levels not seen on a sustained basis since 2014, according to data compiled by Bloomberg.

Oil jumped as much as 2.4% in New York, and Prince Abdulaziz predicted that Saudi Aramco’s $1.7 trillion IPO valuation would soon soar above the level long coveted by his brother, Crown Prince Mohammed Bin Salman.

“Aramco will be higher than the $2 trillion, and they can bet that this will happen,” Prince Abdulaziz said. The state-controlled company would reach that valuation “in a few months” after its shares start trading on Dec. 11, he said.

Aramco didn’t immediately respond to a request for comment about the minister’s prediction.

While a surprise, the move wasn’t unprecedented. Three years ago in the same press room at OPEC’s Vienna headquarters, Prince Abdulaziz’s predecessor as energy minister, Khalid Al-Falih, dropped a similar bombshell on the market by promising to cut substantially below the level it had just agreed with fellow members.

Complete Secrecy

OPEC+, which pumps more than half the world’s oil, agreed in Vienna on Friday to reduce its output limit by 500,000 barrels a day. The deal was initially dismissed by analysts as “housekeeping” or a “nothing-burger” because it simply brought the group’s production target in line with recent levels.

But the Saudi delegation had something else up its sleeve, having made extra efforts to conceal its plans through days of meetings despite hundreds of reporters, consultants and oil traders watching every move. Inside the conference room of the Organization of Petroleum Exporting Countries’ secretariat in the Austrian capital, Prince Abdulaziz asked fellow ministers to maintain complete secrecy on what they were discussing.

“As we moved out of the conference room, I did say: this time it’s going to be different,” Prince Abdulaziz said in a Bloomberg TV interview after the meeting. It was “a common belief and collective belief that we had last night and this morning and this afternoon. I would like to carry on with that spirit.”

On Friday afternoon, as oil prices traded lower and OPEC’s closing press conference was just beginning, the prince revealed the “beautiful news” he’d hinted at previous day.

“We will continue the voluntary cut of 400,000” barrels a day below Saudi Arabia’s official output target, he told reporters. That would bring the total supply cut implemented by OPEC and its allies to 2.1 million barrels a day, a number that even the most bullish analysts and traders hadn’t considered prior to the meeting.

The kingdom will pump 9.7 million barrels a day, he said. That’s a reduction of about 300,000 barrels a day from its output in November and 100,000 below the year-to-date average, according to data compiled by Bloomberg.

Tricky Market

Saudi Arabia is cutting production because the oil market faces a tricky period early next year. Demand growth is slowing and another big expansion in rival production is coming down the pipeline. Together those factors could create another oversupply that drives international prices back down toward $50 a barrel. That’s too low for most OPEC members to balance their budgets, and would make an unfortunate epilogue for the Aramco IPO.

International media had been proved wrong for doubting the Saudi state oil company’s valuation, Prince Abdulaziz said. When the company priced its shares on Thursday night, it was one “one of the proudest days” of his career, he said.

Prince Abdulaziz did warn that Saudi Arabia’s voluntary extra cuts were conditional on other OPEC countries meeting their own production targets in full. Over the past year, several nations, including Iraq, Nigeria and Russia have consistently exceeded their quotas.

To show he meant business about bringing this cheating to an end, Prince Abdulaziz’s opening speech focused on the peril’s of breaking the market’s trust, using religious references to underscore his point. His final press conference was unusually attended by the ministers of Iraq and Nigeria, who promised to stop over producing.

--With assistance from Grant Smith, Laura Hurst, Golnar Motevalli, Salma El Wardany and Nayla Razzouk.

To contact the reporters on this story: Annmarie Hordern in London at ahordern1@bloomberg.net;Salma El Wardany in Cairo at selwardany@bloomberg.net;Grant Smith in London at gsmith52@bloomberg.net;Javier Blas in London at jblas3@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Christopher Sell

©2019 Bloomberg L.P.