Experts had always predicted that there would be periods of volatility for Saudi Aramco as the leader in the oil producing industry because it is located in one of the most turbulent regions of the world.
However there was but a handful who could have predicted such a sudden and sharp drop in the stocks of the most profitable company of the world since its record breaking IPO which was worth $25.6 billion – the highest ever in history.
The killing of the Iran’s most prominent general last week by the United States has sparked fresh fears of a war in the region which has seen the shares of the company dropping to its lowest again on Monday after it touched a low a day ago. The fall showed that the company was not necessarily safe even with rising crude oil prices with Brent crude climbing over the $70 a barrel mark for the first time since May.
After falling 1.7 per cent on Sunday, Aramco shares fell by another 0.1 per cent on Monday. It has started trading as a public company on December 11, 2019.
“The risks will remain over the near term as both the United States and Iran aim threats at one another,” said Jameel Ahmad, a markets analyst at FXTM in London. The drop in Aramco shares “is a natural reaction to the coordinated risk aversion that has swept global sentiment since the events at the end of last week,” he added.
The risks of investments in the Gulf region were once again shown by the killing of Iran’s General Qassem Soleimani in Iraq by a missile attack that was ordered by US President Donald Trump. It was not long ago – in September, that Aramco’s oil production facilities were targeted by a swarm of explosive drones which resulted in a 50 per cent reduction in the oil production capacity of Saudi Arabia. The blame of that attack was pinned on Iran by the US and Saudi Arabia even though responsibility of the attack was claimed by Yemen’s Houthi rebels.
During the launch of the IPO of Aramco, there were a number of international investors who cited geopolitical risks as the primary reason to not invest in the region and in the company while also saying that the valuation of Aramco was overestimated. However, despite the drop in stocks, Armaco’s valuation is at $1.8 trillion which is the highest among all of the listed companies of the world.
One of the advantages of Aramco is that a majority of its shares are owned by investors from the region or those who have had the experience of investing in such as volatile political scenario which has prevented panic selling of shares in the event of regional tensions. Almost $2.3 billion in the IPO had been invested in Aramco by Saudi government institutions.
“Very few active managers are in the stock and most shareholders are either government-related entities, quasi-passive or passive,” said Marwan Haddad, senior portfolio manager at Emirates NBD Asset Management in Dubai. “Therefore volatility would be low unless an actual attack takes place, which we believe has a low probability. Moreover, as the oil price goes up, downside risk falls.”
(Adapted from Bloomberg.com)