Saudi Arabia to cut oil production by an additional 1 million BPD

May 14,2020

From June onwards, Saudi Arabia will effectively slash an estimated 1 million barrels of oil a day in a renewed attempt to balance global energy markets. The Kingdom's Energy Ministry told Saudi Aramco to further cut its production rates above the historic cuts agreed with OPEC+ countries last month, bringing the Kingdom's total pledge to minimize it to almost 5 million barrels per day. Starting next month, Saudi Arabia will produce only 7.5 million barrels, the lowest in two decades, well below the capacity of more than 12 million barrels.

Prince Abdul Aziz bin Salman Energy Minister said, “We want to expedite the process of returning back to normal.”

The Energy Ministry official said the new reduction was meant to "encourage" other members of the OPEC+ alliance, including Russia, to implement reductions that had already been agreed upon. The UAE and Kuwait have indicated that they are able to replace the Saudi cuts with smaller cuts of their own. OPEC+ will discuss a possible extra round of cuts next month as global oil glut persists.

Some analysts saw the new cuts as an effort to help the struggling American shale industry, which was hit by closings and bankruptcies after the oil price collapsed. But Brent crude, the global benchmark, fell 3.4 percent to $29.50 after the announcement, while West Texas Intermediate, the American standard, also dropped to $24.21 per barrel.

The move in the global oil market came after Saudi Arabia took drastic measures to revamp its finances in the wake of the global economic impact of the coronavirus pandemic. Value-added tax will be increased to 15 percent, the cost of living benefits for government employees will be cut, and capital spending on some major projects will be decreased or postponed. But megaprojects such as NEOM and Red Sea Development, the key sections of the 2030 Vision reforms, will continue.

Al-Jadaan Finance Minister Mohammed said, “It may not be as fast as it used to be, but they are continuing.”

The rise in VAT, which is bigger than the IMF has called for in the past, will add to the cost of living, but Al-Jadaan said the impact would be marginal because coronavirus lockdowns would reduce consumer spending.

Some analysts have said that the measure was a return to "austerity" economics in the midst of the global recession caused by the pandemic. Tarek Fadlallah, Chief Executive Officer of Nomura Asset Management in the Middle East, said: "The subtle approach to diversifying the Saudi economy and raising non-oil revenues has been too slow. The authorities have accepted the need to carry about a painful and immediate overhaul of the economy, hoping for longer-term benefits.”

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