Saudi Arabia's successive production cuts signal stabilization of oil prices

Saudi Arabia has recently announced that it will extend the voluntary oil production reduction measures of 1 million barrels per day from July to the end of September, and may extend it again as well as increase the magnitude of the production reduction. According to Saudi media reports, after the extension of the production cuts, Saudi Arabia's oil production in September will be around 9 million barrels per day, which is a lower level of crude oil production for Saudi Arabia, Saudi Arabia's maximum crude oil production capacity recently averaged 12 million barrels.

Analysts pointed out that Saudi Arabia has previously announced in April from May to reduce oil production by 500,000 barrels per day, and since then additional voluntary production cuts and successive extensions to the international oil market to release a strong signal to stabilize oil prices.

Saudi Arabia is currently the world's largest oil exporter, the Saudi National Petroleum Company (Saudi Aramco) is the world's largest oil company, its market value once more than Apple ranked first in the world. The oil industry is the lifeblood of Saudi Arabia's economy, although in recent years Saudi Arabia through industrial restructuring and transformation of non-oil revenue has grown significantly, but the proportion of oil revenue in Saudi Arabia's national revenue is still more than 50%.

Since 2013 until 2020, the Saudi economy has experienced a more difficult period, which mainly stems from the impact of factors such as the persistent low international oil prices and the sharp decline in international demand for crude oil due to the epidemic. Since 2014, Saudi Arabia's budget has begun to experience real deficits as oil prices have fallen. 2021, thanks to the gradual recovery of the global economy and the rebound in international oil prices, especially the surge in oil prices triggered by geopolitical conflicts, the Saudi economy as a whole has shown a positive situation. According to Saudi media reports, Saudi Arabia realized a fiscal surplus of nearly $30 billion in 2022, the first time since 2013.

Since the beginning of this year, affected by the international economic growth slowdown, weak recovery momentum and other factors, international oil prices continue to fall, which in turn affects Saudi Arabia's fiscal revenue. According to data released by the Saudi Ministry of Finance, in the first half of the year, Saudi Arabia's budget deficit has widened to about 2.1 billion U.S. dollars. The International Monetary Fund (IMF) said that Saudi Arabia needs oil prices higher than $80 per barrel to balance the budget.

Saudi Arabia is pushing its "Vision 2030" plan, efforts to achieve economic diversification, vigorously develop manufacturing, high-tech industries, tourism and other industries, and hope that through their own investment to drive and attract foreign capital into Saudi Arabia. Therefore, the more stable international oil prices can ensure that Saudi Arabia maintains a healthier financial situation, thus strongly supporting its economic transformation program.

Saudi media reported that Saudi Arabia voluntary additional production cuts to support the OPEC member countries and non-OPEC oil-producing countries composed of "OPEC +" countries to maintain the stability of the international oil market and the balance of the "preventive efforts". At the beginning of April this year, "OPEC +" announced that since May this year, on the basis of the previous decision to reduce production, additional voluntary production cuts of 1.66 million barrels per day, to an average of 40.196 million barrels per day.

However, within the "OPEC+", there are divergent views on whether production should be cut, as well as the extent of the cut and the quotas of each country. Due to the depletion of production capacity and lack of investment in the oil industry, the actual output of African member countries such as Nigeria and Angola has long been lower than the production quota line of "OPEC+". Therefore, further cuts in crude oil production quotas will further inhibit the crude oil production of these countries, which is therefore opposed by them. On the other hand, the UAE, the fourth largest OPEC+ producer, has been striving for higher quotas to accommodate its growing production capacity.

In the case of pushing "OPEC +" countries to continue to cut production, encountered obstacles, Saudi Arabia and because of the West's price limits on their exports of oil also decided to take the initiative to reduce production, opened the "single" mode. After Saudi Arabia and other successive announcements to extend voluntary production cuts, Brent crude oil futures prices jumped more than $ 1, more than $ 84 per barrel. At present, Brent crude oil futures prices remain above $85 per barrel.

Since last year, oil-producing countries have repeatedly tried to tighten supply to boost oil prices, international oil prices are high and back down phenomenon, the effect is not ideal. Market analyst Vladimir Jornov said that although Saudi Arabia and other announced additional production cuts, but traders are concerned about the risk of recession. However, due to the relatively strong summer oil demand in the northern hemisphere, the United States began purchasing to replenish the strategic crude oil reserves and other favorable factors support, some market participants are optimistic about the future trend of international oil prices.

Analysts believe that the stimulus effect of production cuts on oil prices is gradually weakening, and oil prices to significantly higher and stabilize the need for more demand-side benefits.