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How Extending Oil Production Cuts Can Haunt Saudi Arabia?

The Kingdom of Saudi Arabia (KSA) has extended its oil production cuts until September 2023. The announcement was made on August 3, 2023. The move is aimed at supporting oil prices, which have been under pressure in recent months due to concerns about the global economy.

This is the second time that Saudi Arabia has extended the cut by one million barrels per day (bpd). The first extension was announced in May 2023, which was supposed to last till July 2023. The cuts are part of an agreement between OPEC and its allies, known as OPEC+, to reduce global oil production by 4.32 million barrels per day.

Despite these efforts, maintaining higher oil prices seems to be increasingly challenging for the kingdom.

Oil Production Cuts Amidst Surging Demand

According to the state-owned Saudi Press Agency (SPA), KSA is set to produce around 9 million bpd for September 2023. This includes the previously agreed reduction of 1.6 million bpd by OPEC Plus members in April, which will continue until December 2024. SPA claimed that this this extra reduction was implemented to strengthen the combined efforts of OPEC+ nations in stabilizing the oil market.

The International Energy Agency’s (IEA) Oil Market Report for August 2023 forecasted a record-breaking rise in oil demand. The report anticipates an increase of 2.2 million bpd in oil consumption, pushing global demand to 102.2 million bpd by the end of the year Notably, 70% of this surge is credited to China’s rapidly expanding petrochemical activities.

KSA plays a considerable role in global oil market but extending oil production cuts threaten to strain its capability to benefit from increased demand.

Dethroning in Sight

While these developments have undoubtedly benefited KSA’s economic outlook, experts remain cautious about persistent challenges. There are multifaceted obstacles that could undermine the kingdom’s oil price goals. Factors such as increasing global oil supply from nations like the US, Brazil, and Guiana, alongside the prospect of an economic slowdown, cast shadows on Saudi Arabia’s aspirations.

Despite the collaborative efforts between KSA and Russia to extend oil production cuts and support high prices, Russia’s steadfast market share expansion, especially in its key consumer base including Turkey, India, and China, has put additional strain on Saudi Arabia’s future revenue prospects. Experts highlight a growing concern that Russia’s increasing dominance might weaken Saudi Arabia’s traditionally strong position in the market.

Trying to Hold On

Amid this evolving landscape, Saudi Arabia aims to keep oil prices above the 80 USD per barrel threshold. However, challenges stemming from China’s sluggish consumption growth and global pressures to reduce fossil fuel usage have raised uncertainties regarding the Kingdom’s ability to sustain these prices.

Furthermore, the United States (US) has emerged as a pivotal force in influencing oil prices. US administration’s actions, such as withdrawing offers to purchase crude for its Strategic Petroleum Reserve, have contributed to the volatility in prices. The Biden administration has decided to postpone replenishing the reserve until prices fall within a specific range. This decision is compounded by the rise in US interest rates, which introduces an extra layer of complexity into the already intricate equation of governing oil prices.

The resultant impact on Saudi Arabia’s economy is tangible. The central bank’s decision to increase interest rates affects borrowing costs, tourism, and disposable income. While Saudi Arabia saw impressive economic growth in 2022, marked by an 8.7% expansion and its first budget surplus in nearly a decade, it is not easy to sustain this growth trajectory in the face of current global oil market trends.

Shifting Away from Oil-dependent Economy

Despite these challenges, Saudi Arabia maintains a strong credit rating, which ultimately facilitate its access to global capital markets and finance ongoing mega projects.

In recent years, KSA has been working on Vision 2030 plan to reduce its reliance on oil and diversify its economy. The plan involves achieving several specific goals by the end of 2030. The initiatives include, investing in renewable energy, developing the tourism sector, promoting entrepreneurship, and expanding the manufacturing sector.

Evidently, the complete shift will take some time and until then, KSA has to maintain higher oil prices. As a country heavily reliant on oil exports for revenue, a decline in price could lead to severe financial stress. It will only be able to generate revenue from other sources after the successful transition. A diversified economy could help KSA to worry less about declining oil prices.

Also Read

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