Dubai: The market debut of state-owned oil giant Aramco may have dominated the public limelight in 2019, but recent trading has simmered the offering down to one that’s just at par with expectations.
Aramco, which touched a high of 38 Saudi riyals in the first few days of trading, has fallen about 10 per cent since then and is currently trading just below its opening price of 35 riyals. It has dropped about 2.5 per cent since the start of the year and is inching towards its set IPO price of 32 riyals.
Aramco shares came under pressure when investors pocketed year-end profits, but the selling pressure escalated after geopolitical risks heightened in the region as investors worried about Iran, said Mohamed Zidan, Chief Market Strategist for ThinkMarkets in Dubai.
The US launched a military strike and killed a top ranking Iranian general last week, which raised the prospect of an escalating crisis in the Middle East that could dent the world economy. The event also sent Brent surging to over $70 a-barrel at one point.
Saudi Aramco’s market value has shed over $200 billion in the last two days of trading since its post-IPO peak. It fell 1.7 per cent on Sunday and as much as 1.2 per cent on Monday, with the stock’s downtrend accelerating in the wake of recent warlike rhetoric between the US and Iran. Some analysts believe Iran could retaliate by targeting oil infrastructure, placing Aramco at increased risk of a crippling strike.
“Markets assumed Aramco’s production facilities and its infrastructure are a potential targets for a retaliation which caused the recent panic,” Zidan said, but added that he believes the concerns and risk-off sentiment would diminish in time.
The volatility in shares comes less than a month after the company’s historic $25.6 billion share sale. It has been widely flagged that Aramco would be prone to geopolitical risks given that the oil firm is located in one of the world’s most turbulent regions.
No oil correlation
Aramco, the crown jewel of the world’s largest exporter of petroleum, handed over a 1.5 per cent stake in the oil colossus to the local public on December 11. The stock, which was largely expected to trade in line with oil prices by now, has currently been trading against the recent Brent surge.
“Aramco share and oil prices are supposed to be positively correlated under normal circumstances, however, the current condition is different as oil prices surged because the concerns of the disruption in oil supply and production which is a contrary risk of what is priced in Aramco shares,” Zidan said, adding that he sees prices stabilizing between 32 and 36 riyals in the short term.
This is the second time in recent months that Iran-related geopolitical risks have hurt Aramco. The first was when drones struck its oil plants and disrupted supply in September, which Iran-backed Houthi rebels in Yemen - who’ve launched several drone attacks on Saudi targets in the past - claimed responsibility.
“Technically, a markets is a ‘bear’ when we see a decline exceed 20 per cent of the highest price, the share already lost 10 per cent so far which could be considered a correction phase not a new trend,” Zidan added. A ‘bear’ is a stock market terminology which refers to when share prices are falling and prompts more selling.
Aramco’s IPO was considered the centrepiece of Prince Mohammed bin Salman’s vision for diversifying the kingdom away from its oil dependency by using the proceeds from the stake sale to develop other industries.
But investors abroad balked at the lofty valuation goal, citing uncertainty Aramco would face from volatile oil prices, climate change concerns and geopolitical unrest in the region. Global backlash for the murder of Saudi journalist Jamal Khashoggi, tanker attacks across the Arabian Gulf, and the recent missile strikes were widely argued as strong deterrents for long-term institutional investors.
While Aramco has performed better than Saudi Arabia’s benchmark Tadawul index this week, the sudden rise in geopolitical tension comes just as the end of the stabilisation period for the shares nears. During the stabilization period underwriters look to keep the price of the new share issue at or above the offering price on the market.