February 28, 2024

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Saudi Aramco abandons expansion plan, raising questions about demand

Saudi Aramco abandons expansion plan, raising questions about demand

(Bloomberg) — Saudi Aramco has abandoned a plan to boost its oil production capacity, a major decline that will raise questions about the kingdom’s view of future demand.

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The surprise move comes after the world's largest oil exporter said in November that it was progressing “very well” on a multibillion-dollar project to boost production capacity to 13 million barrels per day by 2027 as demand in China and India continues to grow. Saudi Arabia currently has a capacity of 12 million and produces about 9 million per day, after it reduced production as part of OPEC+ efforts to revive the global oil market and prevent surpluses.

“It is the clearest sign yet that the Kingdom is easing its expectations for growth in global oil demand in the coming years,” said Vandana Hari, founder of Singapore-based Vanda Insights.

The plan change – ordered by the Saudi government – will deplete a large portion of the supply reserve that traders had been anticipating later this decade, a gap that may be difficult to fill by others. But maintaining additional spare capacity is expensive, especially since oil demand is likely to slow in the future with the energy transition.

Aramco will update its capital spending plan when it announces its annual results in March, according to a statement. RBC Capital Markets expects the company to reduce its annual budget by about $5 billion from previous guidance.

“Importantly, this also represents a change in tone for one of the world’s largest oil producers at the government level, and there is likely to be a lot of speculation about the potential ramifications for global oil demand in the medium and long term,” the bank analyst said. Birage. Burcataria said in a note.

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While crude oil remains the backbone of the economy, Saudi Aramco is expanding into natural gas, chemicals and renewable energy. A person familiar with the plans said that these companies are likely to get a share of the money saved from expanding oil production capacity.

The company also expects to free up an additional 1 million barrels per day of oil supply for export by 2030 as a result of the Kingdom's broader domestic plan to stop burning oil for power generation.

Extra money

This decision comes at a time when Aramco is paying much larger profits to the government, even while reducing its production. The company – 98% state-owned – raised its quarterly payments by more than $10 billion to $29.4 billion over the previous two quarters, as the government looks to finance its fiscal deficit.

Saudi Arabia is likely to post a budget deficit of about 4.3% of GDP in 2024 and has more than $46 billion in financing requirements, according to Dubai-based Emirates NBD. This comes as the Kingdom continues to spend tens of billions of dollars on tourism, sports and other projects supported by Crown Prince Mohammed bin Salman to diversify the economy.

Bloomberg Economics estimates that Saudi Arabia needs an oil price of $108 per barrel to balance its budget and meet domestic spending by its sovereign wealth fund. Crude oil is trading in London near $82 a barrel, largely holding steady as abundant supplies from around the world cope with the deepening crisis in the Middle East.

The Saudi announcement will add to the list of uncertainties facing traders. There is no sign of an end to Israel's war on Hamas, as Houthi militants threaten global shipping in the Red Sea, and there is a growing risk of Iran being drawn into the wider turmoil in the region.

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Saudi Arabia's latest move is likely to have long-term effects on the oil market. Curbing growth plans would leave the kingdom with less future production reserves in the event of supply shocks, especially in the turbulent Middle East.

But in the short term, the market does not need Saudi production capacity of 13 million barrels per day, because there are sufficient levels available after the Organization of the Petroleum Exporting Countries reduced production, according to Amrita Sen, research director at consultancy Energy Aspects Ltd.

“We have to ask ourselves the question: What is the timeline in which Aramco will maintain reduced capacity?” she told Bloomberg TV.

–With assistance from Matthew Martin, Salma El Wardani, Ben Bartenstein, Anthony Di Paola, Farah El Bahrawy, and Paul Wallace.

(Updates with analyst comment in fifth paragraph.)

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