Traders work during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at ... [+]
Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), bought about $1 billion worth of shares in four major European oil companies, the Wall Street Journal reported last Wednesday citing a source familiar with the transactions. These four oil majors include Anglo-Dutch Shell, France’s Total, Norway’s Equinor, and Italy’s Eni. Similar large-scale transactions were originated by off-shore companies connected to the Russian insiders, sources in Moscow and in European financial centers are reporting.
The timing of these massive purchases – on the eve of OPEC’s historic production cut agreement – is at best curious and at worst a flagrant case of insider trading: the Kingdom and Russian insiders acquired shares of these companies at record low valuations just days before the deal (temporarily) boosted oil prices and raised the values of the companies involved. Royal Dutch Shell (NYSE: RDS.A) and France’s Total (NYSE: TOT) saw their stock prices jump around 5% between the PIF purchases reported Wednesday, April 8 and Monday, April 13 (the day after the OPEC+ announcement).
Endowed with over $300 billion in assets, the Saudi PIF is one of the largest in the world. Crown Prince Mohammed bin Salman is using the fund as a vehicle to implement his Vision 2030, which intends to evolve and diversify the oil-dependent economy away from hydrocarbons.
Under MBS, PIF has already purchased significant stakes in Uber, Tesla, and Lucid Motors. Additionally, it has committed $45 billion to Softbank’s $100 billion Vision Fund and has recently bought an 8% stake in cruise operator Carnival Corp after coronavirus devastated its stocks.
It appears that the insiders in the world’s largest oil economies capitalized on the pandemic-led economic downturn and the subsequent oil price crash to build stocks in European oil companies.
6 month Brent Crude price chart
The insiders who purchased shares of oil companies based on information disclosed to them as a part of their participation in, or closeness to, the OPEC + talks stand poised to benefit substantially from the price coordination should markets rebound.
It is worth noting that Yasir Al-Rumayyan, a man that runs the PIF for the Crown Prince, is also the Chairman of Saudi Aramco, the Kingdom’s state-owned crown jewel. Serving these two roles, he may be conflicted, being in possession of high-level insider information while advising the Crown Prince, who in turn sets the production goals and is able to influence oil prices globally.
As for the U.S. jurisdiction over purchases, the energy companies in question are all registered as American depositary receipts (ADRs) or American depositary shares (ADSs). An ADR stock or ADS is a foreign stock that allows U.S. investors to trade its shares on a U.S. exchange. This means that the those involved could be subject to harsh penalties under the US Securities and Exchange Commission (SEC) and Department of Justice, if illegal activity can be proven.
Scott Horton, a lecturer at Columbia University Law School and a prominent author and attorney, suggests that although insider trading allegations related to oil and gas markets are not new, they represent a difficult case. Due to the political, rather than strictly corporate, nature of the alleged insider information in question, more details are needed for the SEC to understand if there are any grounds for prosecution: “Is this ‘insider trading’ the way the SEC would understand it? The SEC would be remiss not to investigate and expose the facts, but whether they would act turns on how strong a case there is, how much it can be tied to the US, and how it affects the international interests of the United States”.
Another leading attorney practicing at the white collar Bar in Washington, D.C., with extensive prosecutorial experience and many years of work on corruption issues for the U.S. Government in Russia, who requested anonymity due to his law firm’s policy, echoes the sentiment of the need for the SEC to answer critical questions:
“The key questions are who and how obtained the information? Who is doing the trading? Does non-public information automatically constitute insider information? Did anyone pay to get said information? Companies which are trading ADRs or stocks on US markets would be within the scope of the US jurisdiction for this matter…this is definitely the knowledge the SEC needs to obtain. Even if it’s investigating other issues, like the alleged insider trading by US members of Congress, the SEC is a big organization, and can walk and chew gum at the same time.”
It’s still too early to determine if any illegal acts were perpetrated, but the timing of the pre-OPEC + agreement oil companies share purchases are certainly suspect. The next few weeks will prove a major test for oil producers, as well as the global institutions that allow our markets to continue operating freely, transparently, and fairly during this pandemic.
These acquisitions come in the context of global oil and industry slowdown: petroleum prices have fallen nearly 30% since early March, and more than 60% since January thanks to the double whammy of plummeting demand and skyrocketing supply. The oil-price war between Saudi Arabia and Russia came to a head in later March, with both countries ramping up production just as the global demand shock of coronavirus picked up, creating a perfect storm for the crude market – and oil companies.
Eventually OPEC and its allies agreed to a landmark 9.7 million barrel per day (bpd) supply cut through June, with president Donald J. Trump playing an active role in the deal’s formation. Wall Street’s initial reaction to the deal was lukewarm, however. With expectations of 30+ million bpd drop in 2Q 2020 demand, the 9.7 million bpd cut will do little to balance the market. It could provide a modicum of price stability in the form of global storage relief, though, which is now reaching maximum capacity.
Brent futures rose 0.9% to $31.78 per barrel after news of the agreement Sunday, but that would not last. The index fell to $30.09 per barrel at market close Tuesday, down 5% on the day. US WTI was down 6%, below $21 per barrel.
With assistance from Raushan Zhandayeva
