Shell Aramco Split Means No Oil Production Cut, Rising US Stocks

By Trey Thoelcke Updated Jan 13, 11:51AM EST · Published Mar 17, 7:45AM EDT

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Shell Aramco Split Means No Oil Production Cut, Rising US Stocks — © Thinkstock

Since July, oil and stocks have traded in tandem. Heavy selling days in stocks that began at the start of 2016 came together with plunges in the oil market. Relief rallies were mainly relegated to days when oil rallied. Given the U.S. credit supply is still expanding rapidly, now even with some initial signs of consumer price inflation as core CPI beat market expectations again, a probable reason that oil and stocks were in lockstep is that sovereign wealth funds originating from oil-producing countries were being liquidated on falling oil in order to raise dollars.

Now, with Royal Dutch Shell PLC (NYSE: RDS-A) and Saudi Arabia’s state-owned Aramco splitting up their 18-year refinery joint venture, two things seem likely. First, the Saudis will not slow oil production, no matter how many meetings are called, and two, the selling pressure on stocks coming from sovereign wealth funds appears to be over. Here’s why.

First, the evidence that sovereign wealth liquidation is at least partly responsible for the recent lull equities is in the foreign exchange data released by the Saudi Arabian Monetary Agency, among others. Saudi foreign exchange reserves have plunged 20% since August 2014, by about $144 billion. It’s similar with other oil exporters. The split with Shell is coming at a time when Shell needs the cash to keep paying its dividend, so Aramco believes it is getting a good deal now. It is signifying that the Saudis are interested in gathering up their assets and going public with Aramco, long speculated to be an end goal.
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It is estimated that an initial public offering for Aramco would be worth about five times the market cap of the largest public company in the world, Apple Inc. (NASDAQ: AAPL) at $600 billion. That means the money that would flood into Saudi Arabian coffers would amount to something close to $3 trillion. That kind of money would give the Saudis way more than enough running room to keep marginal oil producers in the United States out of the market. In other words, no production cuts will be forthcoming from OPEC until the U.S. market has been crushed.

Second, it means the Saudis will once again be flush with cash with which to rebuild their sovereign wealth portfolios. That means they’ll likely be buying again, which not only takes the pressure off U.S. stocks, it adds buying pressure. Much of the money that would be raised from investors will simply be put right back into other stocks. What else are you going to do with $3 trillion?

About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.