Feb 1, 2024 - Energy & Environment

Saudi Arabia's head-scratching oil production move

Illustration of a Rorschach test made of oil, depicting question marks.

Illustration: Shoshana Gordon/Axios

There's no real consensus about why Saudi Arabia ditched plans to raise its max oil pumping capacity — a decision the kingdom has not explained.

Why it matters: State oil giant Aramco's announcement comes amid uncertainty about long-term demand growth, and as nations double down on fighting climate change.

Catch up fast: Aramco on Tuesday scrapped plans to lift "maximum sustainable capacity" to 13 million barrels per day (mbd) by 2027, up from 12.

What they're saying: Some in the energy market's analyst hive-mind see a tacit concession that long-term consumption increases won't match the Saudi's bullish public stance.

  • For instance, a Morgan Stanley note says it could show a "government expectation that demand for its oil will no longer rise as strongly as previously expected," Reuters reports.

Yes, but: "We think the decision is likely primarily a function of a more resilient supply outlook rather than a change in view on demand," Barclays' Amarpreet Singh said in a note.

  • There's lot of supply growth outside OPEC these days, with more barrels from the U.S. (the world's largest producer), Brazil, Guyana and elsewhere.

State of play: Current Saudi production is roughly 9 mbd.

  • That follows decisions in recent years to hold back output via OPEC+ deals and voluntary pullbacks.
  • HSBC analysts see sustained non-OPEC growth and a "slowdown in global demand growth to crowd out OPEC barrels in the medium term."
  • That means "little space" in the market much above 10 mbd from Saudi Arabia in the next 2-3 years, their note on the capacity pivot states.

The big picture: Money looms over this.

  • Rice University's Jim Krane notes Saudi strategy has toggled between grabbing market share and going for revenue from higher prices; it now favors the latter.
  • "Do they need another million barrels a day of production capacity if they're not going to use it? It's expensive to raise capacity and maintain it so that it can be brought on stream quickly," he says.

Meanwhile, the kingdom needs money for economic diversification, including big "Giga" projects, Krane tells me.

  • "The lack of foreign investment for Giga projects and their huge investment requirements may have something to do with wanting to reallocate the investment capital," he said.
  • Speaking of money, Bloomberg reports Aramco — which remains state-owned but did a limited IPO in 2019 — is mulling a new share sale.

Between the lines: Check out this X thread from Saudi oil expert Ellen Wald, who thinks the kingdom's leaders are weighing considerations including...

  • Engineers' concerns about long-term field health;
  • A "different geopolitical situation" than when the Saudis' Abqaiq installations were attacked in 2019, even in light of today's turbulent geopolitical scene;
  • Now, the country is on "decent" terms with Iran and Qatar, and the Saudi conflict with the Houthis subsided.
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