ANKARA
Saudi Arabia’s decision to reduce its production capacity by one million barrels per day (b/d) has had a major impact on global markets, but it has also revealed Riyadh’s preference for raising prices rather than increasing supply.
On Tuesday, national oil company Aramco announced that it had “received a directive from the Ministry of Energy to reach its maximum sustainable capacity (MSC) at 12 million b/d and not continue to increase its MSC to thirteen million b/d. “
Saudi Arabia, the world’s most sensible crude oil exporter and leader of the Organization of the Petroleum Exporting Countries (OPEC), has particularly reduced production from 2022, in a bid to stabilize and potentially increase oil costs to generate lucrative currents. of profits from its crude oil exports.
Patience with low prices led the OPEC organization to reduce its production to 2 million b/d in October 2022. In November, the organization will extend this relief until the end of 2024.
Saudi Arabia is also cutting output by 500,000 bpd from voluntary cuts of around 1. 6 million bpd implemented since May.
Despite these supply cuts, prices continued to decline, and projections of a supply surplus in the first quarter of 2024 caused the group to further deepen production cuts.
Saudi Arabia, which has taken on most of those cuts, announced it would cut 1 million bpd in July last year. The discounts were first postponed until the end of 2023 and then extended until the first quarter of this year.
According to data from OPEC’s monthly oil market reports, although Saudi Arabia’s production was 10,991 b/d before the October 2022 cuts, it fell to 8,956 b/d in December 2023.
Markets react definitively to Aramco’s decision
Douglas McDonald, an analyst at IGM Energy Commodities, said Aramco’s announcement not to increase oil production capacity was “a surprise,” although markets are nevertheless definitely prepared for it.
McDonald recalled that the Saudi Ministry of Energy issued a directive in March 2020 to expand the MSC from 12 million b/d to thirteen million b/d until 2027 in order to breathe life into the kingdom’s oil production capacities.
This expansion, McDonald added, is expected to be supported through primary projects such as Ain Dar, Fazran, Berri, Dammam, Khurais, Marjan and Zuluf, which are expected to contribute around 1. 7 million bpd of additional production and offset declines in other ageing fields.
The IGM analyst, however, highlighted the wording of Aramco’s press release, in which the company said it would “maintain” the MSC at 12 million bpd. He suggests this is a significant update to its strategy and indicates minimal progress towards the ambitious thirteen. expansion target of millions of bpd.
The change, McDonald noted, could simply signal a faster-than-expected decline in the kingdom’s production capacity.
“Choosing not to grow temporarily means that Saudi Arabia can retain more in the market in the long term. It is also expected to save approximately $25 billion in capital expenditures (CAPEX) and operating expenses (OPEX) related to maintaining this capability. ” he said.
McDonald further clarified that the MSC pertains to production capacity rather than actual output, emphasizing that increasing it is primarily about enhancing operational flexibility and the potential for short-term output increases.
“In any case, the 12 million bpd has little effect on reality. Aramco has rarely produced more than 11 million bpd, and only once, in April 2020, did it manage to reach the 12 million bpd level,” McDonald said.
“The decrease in production seems to have a more positive effect on the market and its increase would probably have started to lose relevance,” he added.
The analyst suggests that while maintaining market share remains crucial for Riyadh, the kingdom’s strategic pivot indicates that “it has learned the lessons of 2020 and is prioritizing the ability to influence price rather than volumes.”