Oil, production cut: Saudi Arabia revolutionizes the market

L'Saudi Arabia wants to shake up the global oil market by applying a new economic-energy strategy. A plan that had already appeared clear in 2023, with the tensions within OPEC and the reduction in crude oil production.

A trend that Riyadh is now strengthening and relaunching, which also involves the renunciation of increasing oil production and the “debut” in the system in which the main oil reference parameter, the Brent Datedcapable of influencing futures as well.

The effects of the new Saudi oil strategy

All points of the Saudi program are aimed at influencing the oil market, stimulating increases and thus returning to play a leading role in the sector that Riyadh seemed to have lost. Also because, with the decision to reduce the extraction and processing of crude oilhad been surpassed in production capacity by its “rivals” USA And Russia. Simply “closing the taps” is no longer enough for Arabia, which is now developing a new complex strategy to also affect the mechanisms that establish the price per barrel.

Riyadh's new energy policy has in fact multiplied analysts' doubts about the future of growth in global oil demand, the peak of which could arrive before the end of this decade. L'International Energy Agency claims that the global economy in trouble will slow down the growing global demand for oil starting this yearbefore the widespread diffusion of electric vehicles in the second half of the decade.

According to projections, in 2024 there will be a surplus of unsold crude oil globally due to the slowdown in demand. And above all due to the additional production of countries that do not belong to OPEC and which, therefore, have not joined the cuts of Saudi Arabia and its OPEC+ allies. Like, for example, the BrazilThe Canadathe Guyana they United States.

Saudi Arabia gives up on increasing oil production

To begin with, Saudi Arabia has given up its plan to increase oil production and has given a mandate to Aramco Trading – the commercial operator of the state giant Saudi Aramco, which also operates on behalf of third parties – to maintain its capacity to 12 million barrels per day. That is, without bringing it to the 13 million initially expected, despite the 40 billion dollars allocated and partly already invested. It's a major shift in energy policy for the world's largest crude exporter, which has effectively abandoned plans to expand its maximum production capacity by another million barrels per day by 2027.

The reference price of oil is around 80 dollars a barrel, just below the average cost recorded in 2023, despite the conflict between Israel and Hamas and the Houthi attacks from Yemen to ships transiting the Red Sea. To help keep you high crude oil prices, Saudi Arabia and its OPEC allies then agreed to withhold more than a million barrels of oil production per day. The Saudi move therefore it does not reveal technical difficulties nor greater attention to environmental issues and climatic. Riyadh's motivations are strictly economic.

According to experts, the Saudi decision to abandon Aramco's expansion programs “it will cause effects on the entire energetic complex” and has already “sparked much speculation about the potential implications for global oil demand in the medium to long term.” Over the past year and a half, Saudi Arabia has gradually reduced its oil production, passing from approximately 10.2 to 9 million barrels per day. This means that, in the event of an energy emergency, the demand for oil would not remain unmet: the Arab monarchy could in fact extract at any time at least 3 million more barrels per day without problems, with which to supply the world. From a purely economic point of view, therefore, It is not worth investing billions of dollars in Riyadh to increase production capacity that would probably not be exploited at the moment.

Last year Saudi Arabia produced about 9 million barrels of oil a day, enough to nearly satisfy 10% of global demand, but has the concrete capacity to produce up to 12 million. The Saudi crown prince himself, Mohammed bin Salmansaid his country could increase its production capacity to 20 million barrels per day.

Intervention in the Brent system

However, Saudi Arabia's plan also includes other stages. As Reuters reports, national oil company Aramco has begun trading on a grade of U.S. crude it supports the global benchmark Brentas part of a process managed by the rating agency S&P Global Commodity Insights (division of S&P Global). Aramco recently sold several cargoes of crude from the US and in December it instead purchased a cargo from North Sea producers. In short, Aramco Trading has intensified its activity on the physical markets, in which it has become one of the major players in the world. The trading volume has reached the considerable share of 6 million barrels per day of crude oil and refined products.

Aramco has however also cut the price of its crude oil for Asian customershighlighting how difficult it is for the world's largest oil exporter to juggle maintaining market share and containing enough production to support prices.

What the oil market will look like in the coming months

As we have already anticipatedthe slowdown phase of the global economy, especially in Chinaand the effect of climate change is weighing more than the prospects of a reduction in supply from theOPEC+whose set also includes the Russia. In the meantime, as we have mentioned, the USA has reached the extraction record of 13.2 million barrels per day, unsurpassed for individual countries. The American move and that of the other aforementioned states have effectively made the project with which Saudi Arabia intended to raise prices above $100 a barrel and thus finance ambitious national projects, ranging from resorts as large as Belgium and infrastructure.

Despite Western sanctions, then, large producers such as Iran and Russia have flooded the market with oil, even managing to sell a barrel at more than the established 60 dollars. All with the complicity of third-party operators, including Western shipowners and insurance companies. In light of all this, the International Energy Agency estimates a growth in demand of 880 thousand barrels in 2024, down from the million previously estimated. With a privileged look at what is happening in China. Despite importing oil and fuel in massive doses, Beijing has however increased its inventories and storage levels, which could lead to a decline in crude oil imports in the coming months.