Saudi Arabia’s surprise reversal of its oil expansion ambitions was at least six months in the making, said an industry source, after Riyadh concluded its vast spare capacity was enough to supply markets during crises and further investments in new fields would make no economic sense.
State oil giant Aramco was ordered by the Saudi energy ministry on Tuesday to halt plans to boost its maximum sustainable capacity to 13 million barrels per day (bpd), returning to the previous 12 million bpd target.
The kingdom is the world’s largest oil exporter and is pumping around 9 million bpd, well below capacity after several output cuts co-ordinated with the de facto Saudi-led Organization of the Petroleum Exporting Countries (OPEC) and its allies.
With around 3 million bpd of capacity to spare, an assessment was made that much of that was not being monetized, the industry source said.
“I think price management is the priority for 2024 and 2025,” said a second person familiar with the matter.
“This is a deferral and will likely resume at a later date,” the person said. “This has no bearing on the view of long-term demand.”
The decision came from the top, both sources said.
The Saudi government’s communication office and energy ministry did not immediately respond to requests for comment.
“We think the decision is likely primarily a function of a more resilient supply outlook rather than a change in view on demand,” Barclays said in a note on Wednesday.
During U.S. President Joe Biden’s visit to the kingdom in July 2022, Crown Prince Mohammed bin Salman warned that Riyadh “will not have any more capability to increase production” after it reached the now-scrapped 13 million bpd goal.
The kingdom had ordered Aramco to reach that level by 2027 in March 2020, during an oil market standoff with Russia. OPEC has been working closely with Russia as part of the so-called OPEC+ alliance.
Since late 2022, OPEC+ has cut 5.86 million bpd of oil output to prop up oil prices, equal to roughly 5.7 per cent of daily world demand, according to Reuters calculations.
Despite record demand, OPEC’s market share has reached its lowest since the COVID-19 pandemic following output cuts and member Angola’s exit, as well as rising non-OPEC supply.
In its latest monthly report, OPEC forecast that demand for its crude would grow by about 1.3 million bpd by the end of 2025, meaning it would only be able to unwind a third of its cuts of close to 4 million bpd.
HSBC said there was little space for more Saudi oil, with rising non-OPEC supply and a slowdown in global demand growth expected to “crowd out OPEC barrels in the medium term.”
According to HSBC’s estimates, Aramco had little space to produce much above 10 million bpd in the next two to three years. “This decision might be a recognition of these trends,” it said in a research note.
Saudi Arabia for decades was the world’s only source of significant spare oil capacity, which acts as a safety cushion for global supplies in case of major disruptions. In recent years, fellow OPEC member the United Arab Emirates has also built up spare capacity.
Aramco is due to release its full-year 2023 financial results in March, when it is expected to provide an update on its capital expenditure, now widely expected to be revised downwards following the capacity decision.
The Saudi state remains overwhelmingly Aramco’s biggest shareholder and heavily relies on its generous payouts.
The change to expansion plans could be driven by “the importance of Aramco to Saudi’s fiscal position with potential capex reduction being directed towards an increase in dividends,” BofA Global Research said in a research note.
Saudi Arabia is the single largest contributor to OPEC+ curbs – and lower volumes, combined with relatively lower oil prices, weigh on state finances. In November, Riyadh said it would extend an additional voluntary 1 million bpd cut it made last summer into the first quarter.
“On its face, the decision may give Saudi Arabia a bit more freedom to maintain a restrictive output policy beyond Q1 ‘24,” Macquarie said in a note, adding it did “not see an oil market sorely wanting for additional Saudi supply.”