The most significant feature of Saudi Arabia’s decision to cut its oil production by 1 million barrels per day in July, with a possible extension, is what it says about assessments of the global economic outlook.
The driving force behind the decision, announced after the OPEC+ meeting in Vienna on Sunday, is that the much-touted “recovery” of the Chinese economy after the lifting of anti-COVID health measures is not happening , which leads to a further slowdown in the Chinese economy. the world economy and the drop in oil prices.
The meeting was held two months after the cartel, which includes many of the world’s top oil producers, announced production cuts to try to keep prices up. But those measures have proven largely ineffective and the price of oil has fallen 12 percent since mid-April, hitting $70 a barrel at one point last week.
Saudi Arabia, under the leadership of Crown Prince Mohammed bin Salman, has embarked on a major investment and infrastructure program to try to reduce its dependence on oil production. But the program, which has so far failed to attract significant support from international investors, is dependent on oil revenues coming through.
The Wall Street Journal reported that in recent months Saudi policymakers have been warned that “the kingdom needs high oil prices for the next five years to continue spending billions of dollars on ambitious projects that have so far attracted little investment from the foreign”.
According to the International Monetary Fund, Saudi Arabia needs an oil price above $80 a barrel to balance its budget and finance major projects. But as the global economy slows — the IMF has forecast global growth this year will hit its lowest point, aside from the COVID-19 recession, since the 2008-2009 financial crisis —, recessionary trends are exerting downward pressure on oil prices.
Since last October, when OPEC+ cut production by 2 million barrels a day followed by a further cut of 1.6 million barrels in April, the price of Brent crude, the main benchmark international, has fallen by around 20 percent.
Oil prices have risen to $90 a barrel at times, but the dominant trend has been downward. Predictions made earlier this year that the price could reach $100 a barrel have not materialized.
The latest Saudi cut is only for July at this stage, but could be extended. After the meeting, Saudi Energy Minister Prince Abdulaziz bin Salman, the crown prince’s half-brother, said it was a “Saudi lollipop,” meaning a sweetener for the rest of the group that he didn’t have to make cuts.
“We want to frost the cake with what we’ve done,” he said. “We will do whatever is necessary to bring stability to this market.”
And in an effort to cover tensions within the group, he said “the quality of cooperation is unprecedented.” It seems not so.
Saudi production will be cut to 9 million barrels a day, compared to its maximum capacity of 12 million.
It seems the Saudis wanted cuts from other producers but didn’t get them. According to a WSJ report, there was a “fiery exchange” at the meeting as the Saudis pushed other members to make cuts “but faced strong resistance, particularly from some African producers.”
Abdulaziz was reported to have called some African delegates to his hotel suite in Vienna on Saturday and told them that their production quotas would be reduced, but they left the meeting without any agreement, and it was only in the last minute Kuwaiti and Algerian representatives managed to secure a deal.
In this case, the best the Saudis could get was an agreement by others to meet their existing production targets with the Saudi decision to voluntarily reduce production, getting the agreement on the line.
The tensions produced by the slowdown in the world economy and its impact on the oil market were evident in the period leading up to the meeting.
Throughout this year, Abdulaziz has been denouncing short sellers on Wall Street whose speculative activities have been causing prices to fall. He warned last month that they needed to “watch out”, an indication that the Saudis would at least try to induce a price rise so that they would take losses by playing a dip.
In a further indication of the tensions, the Saudi energy minister barred several journalists, including entire teams from Reuters and Bloomberg, from covering the meeting, presumably because their reports had fueled speculation that oil prices they would continue to fall.
But there are much more powerful forces at work than the writings of financial journalists. In addition to the global slowdown, an important long-term factor is the attempt to move away from carbon dependence.
In the immediate situation, the main factor is the slowdown in China. All the latest data on industrial production, consumer spending, housing and real estate markets and investment indicate that even the 5 percent growth target for this year, the lowest in three decades , will be very difficult to achieve.
The rest of the world, including major economies, faces a sharp slowdown in growth this year, if not a recession, due to interest rate hikes led by the US Federal Reserve and followed by others central banks
The hope, even among the Saudis, was that the global economy would be dampened by Chinese growth after the end of COVID-19 lockdowns and other public health safety measures late last year.
How Sydney Morning Herald Economics columnist Stephen Bartholomeusz noted: “OPEC+ had expected a big rebound in oil demand and oil prices in the second half of this year, but unless China’s economic engine stops boiling and start roaring, that would seem unlikely, which leaves more supply-side manipulation as the main lever.”
But with many producers, particularly in Africa, facing worsening economic conditions, there is little appetite for such moves, and even the Saudis, he noted, are only willing to continue for a month at the time
