Saudi Arabia Is Cooking Up A Surprise For The Oil Markets

Recent production cuts by Saudi Arabia are beginning to take a toll on the nation’s economy, according to the IMF’s latest World Economic Outlook. The Kingdom’s 2023 GDP growth projections have been significantly reduced, now expected to reach only 1.9%, down from the previously projected 3.1% in May. The IMF attributed this downgrade to the production cuts announced in April and June as part of the OPEC+ agreement. Despite efforts to diversify the economy with Vision 2030, Saudi Arabia remains heavily reliant on hydrocarbon revenues, with the impact of oil market developments still outweighing the growth potential of non-hydrocarbon sectors.

Although the Kingdom has taken strides in economic diversification, all new projects, including the ambitious Giga-Projects, continue to be tied to oil and gas funds. Aramco’s substantial revenue base remains crucial for driving economic activity. While this analysis may not sit well with Saudi officials, the IMF downgrade could potentially be followed by similar reactions in the financial markets.

The unilateral production cut presented by Saudi Energy Minister Prince Abdulaziz bin Salman, which was extended during the recent OPEC+ meeting, is now showing negative consequences. The Kingdom’s official stance is that Riyadh is the sole entity capable of controlling and stabilizing markets, particularly oil prices. However, many analysts have expressed skepticism about the true motives behind the Saudi move, as a tighter demand-supply situation is expected in the latter half of 2023. Some argue that price fluctuations and speculation are part of the market’s natural dynamics, and intervention may not be necessary.

Evidence supporting the effectiveness of the Saudi cut is debatable. When the cut was initially announced, markets showed minimal reaction, and prices remained weak. The slow economic recovery in China and marginal global demand growth have kept oil prices within the range of $75-85 per barrel. The recent price rally can be attributed to factors unrelated to Saudi Arabia’s actions, such as stock withdrawals and reduced fear of a global recession.

Saudi Arabia’s progress in economic diversification projects requires higher foreign direct investments (FDI) and increased government revenues, as well as access to international financial markets. The IMF report has cast some doubt on these aspirations. With the MENA region experiencing lower GDP growth projections and some countries facing financial crises, Saudi Arabia must reevaluate its short-term economic strategies. While non-oil GDP growth is robust, it cannot fully compensate for the current reliance on oil revenues. The low FDI inflow during Q1 2023 raises concerns, especially when compared to the expectations set in Vision 2030.

Market analysts and media should closely monitor Riyadh’s actions in the coming weeks, as a significant change may be on the horizon. Although no immediate changes are expected at the upcoming JMCC meeting, a Saudi production hike before October 2023 is highly plausible. Signs of a new demand-supply crunch in oil and petroleum product storage volumes, along with positive indicators in Asia, Europe, and the USA, could lead to a dramatic shift in the Kingdom’s production volume strategies. A surprise move to prevent oil prices from surpassing $90-100 per barrel in Q4 could be in the works. While the media may not be informed, it is likely that Crown Prince Mohammed bin Salman and his brother are preparing a new Saudi surprise after the summer season.