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Saudi Arabia is cutting oil production

NAfter Saudi Arabia’s announcement that it would cut its oil production by one million barrels a day in February and March, the price of oil rose to its highest level since last February. In return, the Kingdom expects the other member states of the Opec + cartel to keep their production volumes constant, apart from small increases in production in Russia and Kazakhstan.

The cut in production underscores Saudi Arabia’s leadership in the oil industry, said Kingdom Oil Minister Abd al-Aziz bin Salman Al Saud. He announced the unilateral measure on Tuesday evening after a two-day video conference by the OPEC + oil ministers, which includes 13 OPEC countries under the leadership of Saudi Arabia and ten other oil producers under Russian aegis.

Even before the video conference began, Saudi Arabia had dampened the hopes of some oil producers for higher production volumes. Last April, the Opec + cartel agreed on a historically unprecedented cut in oil production by 9.7 million barrels a day and an increase of 2 million barrels from January onwards. Since the oil price had stabilized in recent months, an increase could not be ruled out.

Oil ministers advise monthly

The Saudi oil minister had warned that fuel demand, especially in aviation, is fragile. The uncertainty remains high, the stabilization that has been achieved should not be jeopardized. The oil ministers of the 23 states now want to discuss how to proceed every month at the beginning of the month. Opec general secretary Mohammad Barkino said the outlook for oil demand development is “very mixed” with risks of deterioration. The reasons are the new restrictions in many countries and the uncertainties about the mutations of Covid-19.

Nevertheless, Russia and Kazakhstan will be allowed to produce 75,000 more barrels a day together from February onwards. With this, Saudi Arabia deviates from its previous demand that all members should take a fair share of the funding cuts. In the past, requests from the United Arab Emirates, Iraq and Nigeria to be exempted from production cuts had been denied.

There is still a contradiction between the two largest producers, Saudi Arabia and Russia. While Riyadh wants to push through a higher price, Moscow wants oil production to be expanded to prevent American oil shale producers from regaining market share. Russia had therefore proposed increasing the cartel’s output by 500,000 barrels a day. Goldman Sachs analysts write that the oil supply will be too low for the rising demand in March, when it gets warmer and the vaccines are effective. You are expecting a price of the reference brand Brent of 65 dollars per barrel. On Wednesday it was over $ 54.

The pandemic-induced decline in oil demand is putting the Saudi state budget under pressure. Personal-Financial.com Intelligence analysts estimate that the budget deficit has increased from 4.5 percent of gross domestic product in 2019 to 12.5 percent last year. Oil exports cover 64 percent of Saudi government spending. Income decreased by 33 percent in the first nine months of 2020 compared to the same period in the previous year. Saudi Arabia needs an oil price of $ 81.5 a barrel to finance the budget without debt. The national debt will increase from 37.2 percent to 42.1 percent of the gross domestic product in 2021.

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