The world is anxiously awaiting the largest IPO ever set to take place at Saudi Arabia’s Tadawul Stock Exchange when the largest and most profitable company in the world Saudi Aramco goes public. Investors can begin applying for the IPO from November 17 through December 4 before the official trading at Tadawul stock exchange begins on December 11.

This IPO is none like any other. It has been shrouded with controversy regarding the accurate valuation with huge gaps in estimates. This could make the first few months of trading the shares of the company at Tadawul very volatile.

Saudi Arabia accounts for about 10% of the global oil supply and is a primary member of the organization of petroleum exporting countries (OPEC). The country relies heavily on oil for economic growth and has been looking to diversify its investments amid increasing risks attached to the oil market. The state-owned Saudi Aramco is the largest oil producer in the country.

Saudi Aramco IPO permutations

In Saudi Aramco’s prospectus to investors, the company highlighted key risks that could affect the future valuation of the company, key among them being armed conflict and political unrest in the region, as well as, climate change movements and the declining demand for fossil fuels.

Saudi Aramco’s current market valuations range from as low as $1.1 trillion to as high as $2.5 trillion, but the Crown Prince, Mohammad bin Salman bin Abdulaziz Al Saud puts the company’s value at $2 trillion.

The company plans to offer 2% ownership to the public via the IPO, which going by the Crown Prince’s valuation of about $2 trillion would equate to a cash inflow of about $40 billion making it the largest IPO ever. Even if the eventual valuation drops to $1.5 trillion, the IPO offer of $30 billion would still be bigger than Alibaba Group’s (BABA) offer of $25 billion a few years ago.

The company produces about 10 million barrels of oil per day alongside other petroleum products. In the latest financial year, it reported profits of about $111 billion, which arithmetically dwarf the profits of Apple Inc. (AAPL), The Royal Dutch Shell (RDS-A) and Exxon Mobil (XOM) combined. This shows the level of impact the company could have on the oil trading market once its shares begin trading publicly on December 11.

The IPO could shake the oil market

While the IPO is expected to be dominated by institutional investors, individual retail investors will also get an opportunity to invest in the world’s largest company operating solely in the petroleum industry.

In general terms, oil prices are driven by global demand and occasional geopolitical frictions which tend to stifle supply in the short-term. From the demand side, the key players are governments and gas service companies. As such, when global economies are booming, oil prices tend to go higher, and vice versa.

From a fundamental perspective, this is the same as looking at the financial and forward-looking statements of a company when analyzing a stock. But stock prices are also affected when a major company in the sector performs poorly leading to a plunge in the stock price. 

In the same way, when the share price of a gigantic $2 trillion oil company falls, other oil stocks could follow leading to a sector-wide plunge. By extension, this could have far-reaching effects on the oil trading market if one of the major players like Saudi Aramco begins to show weaknesses in growth. Traders could perceive this as a signal of what is to come in the foreseeable future thereby increasing market volatility. 

However, there could be a bit of positivity for now after OPEC allayed fears of a slowdown in the demand for oil on Wednesday, the prices of the WTI crude and Brent crude all bounced to hit new 4-week highs. Perhaps the future continues to shine bright for Saudi Aramco ahead of the IPO.

Conclusion

Some reports have suggested that a slowdown in demand could begin as early as 2035 due to an increase in climate change movements and the penetration of alternative energy sources. 

In investment terms, 2035 is close enough to cause a stir in the oil market and Saudi Aramco could be the perfect barometer to gauge the level of impact these demand reports could have on the industry in the short-term.