Should You Invest In Aramco Saudi Arabian Oil Corp?

Aramco is state-owned and controlled by the Saudi government and the royal family. However, the Saudis did not found the company. That distinction goes to Standard Oil Co. of California, now known as Chevron, after it received a concession from the Saudi government in 1933.

Traded as SAOC, the Aramco initial public offering (IPO) was announced in November 2019, with company stock first available for trade one month later. The IPO was expected to be the largest in history, although it was unclear if the value estimation was accurately measured. Officials in Saudi Arabia previously estimated the value of Aramco to be somewhere in the neighbourhood of $2 trillion. However, this claim was contradicted by financial analysts at Bloomberg, who valued the company at around $1.2 trillion. At the initial stage of the IPO, SAOC stock was valued between $8-$8.5 per share, a price that would put the company’s total valuation at approximately $1.71 trillion.

While some traders are familiar with possible factors that could cause fluctuations in oil stocks, they should not overlook factors that could specifically affect Aramco stock price.

• Sources: An oil company’s ability to extract oil is potentially limited by its available sources. Aramco enjoys more access to potential oil sources, both on land and offshore than most of its competitors. However, should they lose some of that access, their stock could decline.

• Saudi Economy: Due to its size and importance, Aramco’s performance will have a strong connection to that of the Saudi economy. It is possible that if the country suffers from an economic downturn, Aramco stock will suffer as well.

• Cash Flow: In order to capitalise on its significant energy sources, Aramco will require tremendous financial resources. While this is true for all energy companies, it is especially important for Aramco, which controls over 100 oil fields. The company’s stock could remain strong as long as there is cash on hand to take advantage of the energy resources available.

Traders can learn more about the stocks of the biggest oil producers by visiting similar pages on the eToro platform, such as Exxon-Mobil and Royal Dutch Shell.

While reasons are numerous and reasoning can be debated, here are some common examples that can possibly cause fluctuations in the value of oil stocks.

• Geopolitical Events: Geopolitical activities can have a significant impact on the value of oil stocks. Scouring the news on a daily basis is often a requirement, with prices fluctuating daily as the political landscape shifts. Some examples include war, trade agreements between countries and damaged refineries by extremist groups.

• Weather Patterns: Oil and other energy markets that provide heating, are often directly connected to changes in weather patterns. While this is certainly not a guarantee, it is sometimes the case that oil stocks will rise in value, as demand for heating increases during the winter months.

• Economic Activity: Demand for oil and other energy-related resources can fluctuate according to the performance of international markets. For example: A stronger economy will usually require an increased amount of oil in order to satisfy its industrial sector. Another reason could be the increased demand for workers. Since oil is often used to power both private and public modes of transportation, lower unemployment rates are often a sign of an uptick in the number of people commuting to work, which in turn leads to higher demand for petrol.

Aramco, similar to many other stocks of the biggest oil groups located in Saudi Arabia, can often be affected by specific events in the global markets. While this list is certainly not all-inclusive, here are several key factors to watch for.

• Saudi-US Relations: The Saudi Arabian economy relies heavily on its special, and some argue preferential, relationship with the US. For this reason, the Saudi economy is often influenced by the performance of the American economy, with a slowdown or recession in the States potentially causing a decrease in oil demand, resulting in a fall of oil exports.

• Regional Tensions: The Saudi conflict with its regional neighbour, Iran, can cause oil prices to increase if it is perceived that the supply of oil will not be able to meet global demand. An example of this could be if one country seizes control of the other’s oil tankers. Even if this occurs over a short period of time and with the use of political instead physical force, the market may panic, causing a sharp increase in value until the situation is resolved.

• Questionable Property Laws: While it can be argued to the contrary, many investors believe that the lack of transparency and business equality in Saudi Arabia can be a cause for concern when investing in one of its companies. The royal family’s absolute power over the court system and government can often make traders uncertain or even reluctant to trade a specific Saudi-based stock.

• Day traders who are interested in taking advantage of price fluctuations in the global oil market.

• Thematic traders who often target commodities in general or oil more specifically.

• Traders who are searching for ways to diversify their investment portfolios with commodities in order to offset their reliance on the performance of a different financial sector.

How will the Saudi Aramco IPO impact oil markets? While the answer remains unclear, there is no doubt that Aramco has the potential to be one of the most exciting and popular stocks over the next few years. Its sheer size and importance will certainly make it a hot-button topic in many financial circles. As one of the largest IPOs in history, it will certainly be interesting to see how it alters the public perception of Tadawul, which was largely ignored by most traders in the past due to its miniature dimensions as compared to other international exchanges. There are many unanswered questions surrounding the company, exchange and country, causing both concern and excitement.