Saudi Aramco is to the oil industry what Apple is to IT, and last weekend it suffered a catastrophic terrorist attack that halted 50% of its oil production. This equates to 5% of the world’s daily oil output and caused major repercussions in financial markets around the world.
Saudi Aramco oil attack
On Saturday drone strikes hit one of the Aramco factories in Abqaiq, Saudi Arabia, thought to be the world’s biggest crude-processing facility and Saudi’s second-biggest oil field.
The extent of the damage hasn’t yet been disclosed, but losses are estimated at 5.7m barrels of oil per day.
The country blames Iran, as does the US. Houthi rebels in Yemen have taken responsibility, but it’s hard to believe they have the capability or finances to carry out such an attack unaided, which is why the US believes Iran is responsible.
The US and Iran have been at loggerheads for months now, with rifts in the Strait of Hormuz already affecting oil prices. This latest attack does not bode well for future relations between the countries and many are already worrying the US will retaliate. Oil prices surged as much as 20% after the attack.
However, with the prospect of Saudi outputs halved, Trump quickly agreed the US can dip into its reserves to help meet the world’s oil needs.
Oil prices
What does this mean for oil company share prices? The oil majors’ share prices immediately soared, with BP and Shell making gains on Monday. Mid-cap oil stocks also spiked: 10% for Premier Oil, 9% for Wood Group, 8% for Cairn and Tullow Oil, while Petrofac and UKOG also rose.
Initial damage assessments estimate it could take months to return production to normal levels, but by Tuesday reports were saying everything will be up and running within two to three weeks. As a result, the oil price fell back 6% again along with much of those oil companies’ previous share price gains.
Saudi Aramco has been toying with the prospect of an initial public offering (IPO) on the Saudi stock exchange for three years now. Crown Prince Mohammed bin Salman wants to encourage foreign investment and move away from being solely reliant on oil.
Last week, preparations for the IPO were thought to be speeding up, as Aramco hired banks including Morgan Stanley and Goldman Sachs. With half its production now in peril and the security of its infrastructure deemed an easy target for terrorists, I imagine it’s unlikely the IPO will go ahead in November as rumoured.
The true value of Aramco has never been disclosed and valuations vary wildly. Bloomberg Intelligence values Aramco at $1.1tn. The recent Brent crude highs of approximately $60 a barrel are not enough to support the Crown Prince’s estimated value of the IPO at $2.9tn, which would require the price of oil to be at least $80 a barrel or more. That price has only briefly been seen since 2014.
I think the lesson here is that the world’s oil stocks are more volatile than ever and rarely are oil shares the best introduction for beginners to investing in the stock market. It can be exciting, but very risky, and my advice to beginners is to stick to less volatile sectors such as food and fast-moving consumer goods.