Why Is There an Oil Price War?

Over the last several months, OPEC representatives led by Saudi Arabia have been negotiating with Russia for an agreement to cut back on production from all oil and natural gas suppliers. The idea was that this would keep prices up even as global demand fell due to the coronavirus’s effects on the global economy and on China in particular. Russia never budged. In the end, Saudi Arabia refused to cut back its own production and rather decided to ramp up production while cutting prices in an attempt to cut into Russia’s share of the oil market. Neither nation is in a particularly strong economic position these days which makes the Russian foot-dragging and Saudi decision to cut prices an economic game of “chicken.”

How Can You Benefit from the Oil Price War?

As an investor, what can you do? Oil and natural gas companies with strong economic reserves will survive, making this a good time to buy for the long term. Getting out of companies with weak balance sheets, even at a loss, may be what you need to do to avoid further investing “bloodshed” as the virus, price war, and economic downturn play out.

Vox has a few useful ideas about companies benefiting from the coronavirus.

Predicting what people will do as more and more “lock downs” occur across the world or people simply avoid going out and mixing with crowds much as possible. Netflix stock has fallen a few percent, but the stock is trading at what it sold for a year ago and substantially above last fall. The point is that that when people stay at home they get bored and having entertainment will make time go faster. Netflix and similar streaming services may do OK.

Clorox is on a tear. It is trading at an all-time high as everyone is stocking up on cleansers in advance of the arrival of the virus in their area. Companies that sell soap and cleaners, like P&G, are good ideas. P&G has slipped a bit but is now trading at its price for last July.

Even Campbell’s is doing well as people stock up on food that will last (like canned soup) during a prolonged, enforced quarantine. Campbell Soup Company is off a few percent today as we write this, but it is up about 15% since a couple of months ago and more like 60% from last year!

Sitting on Cash and Buying Later

Last August we wrote about the silent warning for investors from Warren Buffett who was accumulating cash and not buying much. His rationale was that stocks were universally overpriced and nothing met his criteria for intrinsic stock value and other reasons for investing in stock.

If you have some cash on hand, it might be an excellent time to sit on it for now as you watch for opportunities in companies with good long term potential but which are being taken down in the current rush to sell.

What Is Saudi Aramco?

Oil was first discovered on the Saudi Arabian Peninsula in Bahrain in 1932 and in Saudi Arabia in 1938. A succession of US oil companies explored and found oil, sold parts of their interests and found oil in Dubai as well. In 1949, the Saudi king threatened to nationalize oil facilities and gained a 50-50 share of profits. The company continued to find more oil and grow over the years.

In 1973 the USA supported Israel in the Yom Kippur War and Saudi Arabian government retaliated by “acquiring” a 25% “participation interest” in Aramco followed by 60% in 1974 and all of the rest in 1976. Aramco managed operations until the late 1980s at which time the entire operation became the Saudi Arabian Oil Company. This is the real name of the company today despite the IPO being referred to as Saudi Aramco.

This company became the world’s largest in 2005 when its estimated market value approached $800 billion. This month as the shares have risen in value to about $2 Trillion, the company is again the largest in the world, surpassing Apple by a factor of two.

How Can You Invest in Saudi Aramco?

Saudi Aramco trades on the Saudi Arabian stock exchange, the Tadawul. Unfortunately, to invest directly in Saudi Aramco, you need to buy it on the Tadawul exchange. And, according to U.S. News, individual foreign (non-Saudi) investors will not find Saudi Aramco available outside of that exchange.

Aramco decided in November that it would not list its IPO shares on a major U.S. exchange, making it difficult for the average U.S. investor to gain access to the stock. Tadawul has strict rules about foreign investment. Qualified institutional foreign investors must have at least $5 billion in assets and at least five years of investing experience to be eligible to trade on the Saudi exchange. Prior to 2015, foreign investors were prohibited from trading on the Tadawul exchange entirely.

For the time being, the only alternative for the normal investor is to buy shares of an ETF that tracks a basket of Saudi stocks (which will soon include Saudi Aramco). One example is the iShares MSCI Saudi Arabia ETF but there are others as well. This approach dilutes your exposure to Saudi Aramco but, for now, is the best alternative for most investors.

Is Saudi Aramco a Good Investment?

The Saudi Arabian Oil Company makes lots of money as the country sits on a vast pool of oil and natural gas. However, there is a long history dating back to 1949 of the Saudi government (king) finding reasons to increase the government’s share until foreigners are excluded.

Market Watch looks at investing in Saudi Aramco and mentions the ETF approach. They also note the risk of investing in Saudi Arabia by quoting from the IPO prospectus.

The interests of the Government, the Company’s controlling shareholder, may differ from the interests of the Company or the Company’s minority shareholders. The Government will continue to own a controlling interest in the Company after the Offering and will be able to control matters requiring shareholder approval. The Government will have veto power with respect to any shareholder action or approval requiring a majority vote, except where it is required by relevant rules for the government.

And, because Saudi Arabia is a monarchy, the rules for the government can be changed at any moment by the king.

This having been said, Saudi Aramco makes a lot of money and buying shares of an ETF that tracks the company as part of a basket of Saudi stocks is a reasonable way to diversify your portfolio. Just don’t put everything that you have into this investment and wake up some morning to find out that the Saudi Royal Family needed more money and “acquired” your investment!