Oil Tumbles After Saudis Say They Will Freeze Oil Production Only If Iran Joins

And so the great "oil production freeze" rumor, which helped halt oil's plunge after it hit a 13 year low in early February and forced a 50% short squeeze higher, dies.

Moments ago, Bloomberg released details of a 5-hour long interview with the Saudi deputy Crown Prince Mohammed bin Salman in which he said that the Saudis would freeze production only if Iran joined. "If all countries agree to freeze production, we’re ready,” the deputy crown Prince said, adding that "if there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door."

When asked if Iran needs to join freeze, his response: "without a doubt. If all countries including Iran, Russia, Venezuela, OPEC countries and all main producers decide to freeze production, we will be among them."

As a reminder, Saudi Arabia is among big producer countries meeting this month in Doha to conclude a plan to freeze output; whether Iran needs to participate hasn’t been clear because country is in process of restoring output after years of sanctions. And while Iran’s oil minister is attending Doha meeting, the country has said that it won’t join a production freeze. 

Salman adds that the oil price slump doesn’t pose a threat to Saudi Arabia, as short-term budgetary benefits need to be evaluated against "threat to the lifespan of oil" adding that "for us it’s a free market that is governed by supply and demand and this is how we deal with the market."

And since we, and the market, both doubt this story is part of an elaborate April fool's joke, the price of oil just tumbled as suddenly market participants realize they have been manipulated for the past 2 months and that the structural oversupply in the market will persist.

This particular section which is of highest interest to the market and has already pushed the price of Brent and WTI lower, comes as part of a major Bloomberg story which also reveals that Saudi Arabia is "getting ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets."

As had been reported some time ago first by the Economist, less than 5% of Saudi Aramco, the world’s largest oil company will be sold publicly in Saudi Arabia, Deputy Crown Prince Mohammed bin Salman says in interview in Riyadh. Salman said the sale will include parent company and other assets from units. The remaining shares of Aramco will be transferred to Public Investment Fund with Aramco transforming into large industrial energy co. from oil/gas comapny.

More details from Bloomberg:

Over a five-hour conversation, Deputy Crown Prince Mohammed bin Salman laid out his vision for the Public Investment Fund, which will eventually control more than $2 trillion and help wean the kingdom off oil. As part of that strategy, the prince said Saudi will sell shares in Aramco’s parent company and transform the oil giant into an industrial conglomerate. The initial public offering could happen as soon as next year, with the country currently planning to sell less than 5 percent.

 

“IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” the prince said in an interview at the royal compound in Riyadh that ended at 4 a.m. on Thursday. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

 

Almost eight decades since the first Saudi oil was discovered, King Salman’s 30-year-old son is aiming to transform the world’s biggest crude exporter into an economy fit for the next era. As his strategy takes shape, the speed of change may shock a conservative society accustomed to decades of government handouts.

Bloomberg adds that the sale of Aramco, or Saudi Arabian Oil Co., is planned for 2018 or even a year earlier, according to the prince. The fund will then play a major role in the economy, investing at home and abroad. It would be big enough to buy Apple Inc., Google parent Alphabet Inc., Microsoft Corp. and Berkshire Hathaway Inc. - the world’s four largest publicly traded companies.

In summarizing the capacity of the fund, Bloomberg writes that the fund has been hiring specialists for markets, private equity and risk management, said Alrumayyan, PIF’s secretary-general and a former chief of Credit Agricole SA-backed Saudi Fransi Capital.

“We’re working now on different fronts,” he said. “Now the government is transferring some of its assets, lands, some of the companies to us. We have different projects in tourism and in new industries that are untapped in Saudi.” The Saudi prince described the overseas investment plan as “very aggressive,” though said PIF would initially be skewed toward domestic assets by the addition of Aramco. “Undoubtedly, it will be the largest fund on Earth,” the prince said. “This will happen as soon as Aramco goes public.”

As Bloomberg notes, the question is whether the reaction to the more than halving in the price of a barrel of crude has come too late, especially given the Saudi influence over the oil market. The country will only freeze output if Iran and other major producers do so, the prince said.

What is, however, clear is that the Saudis have no intention of stopping their plan of putting marginal oil producers out of business by keeping the price of oil as low as possible, and that the ultimate endgame with this new mega investment fund would be purchasing lots of insolvent (shale) assets on the cheap.

For now however, the best news is that the recurring flashing red headlines about imminent oil production freezes (and certainly cuts) are officially over for the foreseeable future, as is the main catalyst that has pushed oil of its 13 year trough lows.