Oil price war: Saudi Arabia increases production by one million barrels and requests government departments to reduce their budgets


The Kingdom of Saudi Arabia revealed yesterday that it plans to increase its oil production capacity for the first time in more than ten years, the day after it announced a record increase in crude supplies in a battle over market shares tumbled in world prices last week.

The CEO of Saudi Aramco, Amin Al-Nasser, said in a statement that the company received a mandate from the Ministry of Energy to increase its oil production capacity to 13 million barrels per day from 12 million barrels per day at present. He added that the company is making every effort to implement this directive as quickly as possible. He did not mention a timetable for the plan that requires investing billions of dollars.

Saudi Arabia had reported on Tuesday that it would increase its oil supplies to a record level in April, escalating the confrontation with Russia and rejecting my work for Moscow’s proposal to hold new talks. The price of Brent crude was $ 36.77 a barrel, down 1.2 percent at 07:33 GMT. The Saudi announcement may be seen as yet another step to fueling the price war with Moscow after the collapse of the oil supply reduction agreement between the Organization of Petroleum Exporting Countries (OPEC) and Russia last week.

Saudi Arabia has most of the spare capacity in the world and is represented in emergency reserves that allow the Kingdom to boost production to cover any deficit from other countries.

The state-backed Aramco said it would increase crude oil supplies in April to 12.3 million barrels per day, which is 300 thousand barrels per day more than its maximum production capacity.

The clash of the Saudi oil giants Russia and Russia sparked a sharp decline of 25 percent in crude prices on Monday, and launched panic sales in the US stock market and others amid the damage actually caused by the Corona virus.

Saudi Arabia has been pumping around 9.7 million barrels per day in recent months, but it has additional production capacity to fill, in addition to millions of barrels of stored crude.

Moscow said that Russian oil companies may increase production by up to 300 thousand barrels per day and perhaps by up to 500 thousand barrels per day, which plunged the Russian ruble and shares. Talks collapsed last week between members of “OPEC +”, an informal alliance of OPEC countries, Russia and other producers, which has been supporting prices since 2016. Russia has rejected OPEC’s call to deepen existing supply cuts, with the organization responding to abolishing production restrictions, and Russia says in turn It will also boost production. Shares of “Aramco” recovered on Tuesday after falling by as much as ten percent Monday to drop from the initial public offering price in December, when the world’s largest oil companies were listed on the Riyadh Stock Exchange.

The last time Saudi Arabia sought to raise energy at a cost of $ 100 billion ten years ago was amid a price boom thanks to economic growth in China. Since then, Saudi officials have ruled out investing in new upstream operations to increase energy.

After completing the kingdom’s program to add energy at about four million barrels per day in 2009, Saudi officials and oil company officials talked about the possibility of targeting another increase to 15 million barrels per day by 2020, but these plans were set aside a few years ago as demand slowed.

This does not mean that the Kingdom was standing idle, but invested billions of dollars in maintaining production characteristics between 1.5 million and two million barrels per day to be used in the event of any global disruption of production.

And in 2012, it launched a five-year plan to invest in exploration and production worth $ 35 billion to conserve current energy.

Saudi austerity measures

In a new austerity move to confront the sharp decline in oil prices, four informed sources said that Saudi Arabia asked government departments to submit proposals to reduce their budgets by at least 20 percent. They added that the request was sent more than a week ago due to concerns about the impact of the Corona virus on crude markets and before the collapse of the production cut agreement between OPEC and its allies on Friday.

A source told Reuters that when sending budget requests, Saudi officials were expecting tough negotiations with Russia regarding the need to deepen production cuts in order to stabilize markets.

A source said: “The oil market was really low because of the impact of the Corona virus on demand in China, and to that there were contacts at the (Saudi) sovereign level and the Russians were not positive.” And the Saudi Ministry of Finance sent directives to government departments to submit proposals to reduce between 20 and 30 percent of their budgets for the year 2020.

One of the sources said that the Ministry of Foreign Affairs has implemented a 20 percent reduction, and that the cuts will not affect wages but rather projects that can be deferred and contracts that have not yet been awarded. The International Monetary Fund saw that Riyadh needs a price of $ 80 a barrel to set the 2020 budget, which has an estimated deficit of 187 billion riyals ($ 50 billion). Economists expect the deficit in the Saudi budget to rise from 4.7 percent of GDP in 2019 to a percentage in the double digits. The government expected a 6.4 percent deficit in December.

The Emirates are increasing production

In addition, the United Arab Emirates, the main ally of Saudi Arabia in the region, expressed its willingness to increase its oil supplies by about one million barrels per day in April, in the midst of a price war between the Kingdom and Russia against the backdrop of the failure of an agreement to reduce production. The government “ADNOC” group said in a statement that it “has the ability to supply the markets with more than four million barrels per day next April”, that is, more than one million barrels of the current daily production rate.

The company also stated that it is “working to accelerate progress towards our goal of reaching a production capacity of five million barrels per day.”

The Emirati move comes to support Saudi Arabia’s position in the price war it is waging with Russia by increasing supplies in the oil-rich markets.


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