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Saudi takes one for the team in global oil markets

The kingdom has been doing all the heavy lifting in Opec+

After the voluntary oil cut, Saudi Arabia's output for October, November, and December will be capped at nearly nine million bpd Reuters
Aramco has been selling crude oil to Vietnam, but has yet to make any investment in the country

It has been a long hard slog over the past few months to inject some life into the global oil market, but at last it looks as though the policies of Opec+ are paying off.

The crude producers’ alliance, led by Saudi Arabia and Russia, has pushed through a series of cuts in output that finally seem to be having the desired effect of balancing variable demand with volatile supply, if the price of Brent is anything to go by.

Today it stands at just a smidgeon off $85 a barrel, a level that satisfies most producers without deterring the big buyers in Asia, such as China and India

But the burden of facilitating this rebalancing has fallen excessively on one producer.

Saudi Arabia has led the way since last year in progressively trimming its production to the point where it now stands at around 9 million barrels per day.

For a producer with the recent capacity to pump 12 million barrels, and longer-term plans to reach 13 million, that is a significant reduction, which will have inevitable economic consequences for the world’s biggest exporter.

Saudi Arabia was the fastest-growing economy in the G20 last year, with GDP soaring by 9 percent.

But that dynamic growth rate will hit the buffers this year and next as lower oil exports impact its most important revenue earner.

The IMF recently downgraded its forecasts for 2023 to just 1.9 percent. 

It will have been galling for the kingdom to see the IMF simultaneously upgrading Russian growth prospects – albeit still lower than Saudi Arabia’s – to 1.5 percent this year.

The leader pays the price

It looks as though Saudi Arabia has been doing all the heavy lifting in Opec+ as Russia – which only recently began to implement cuts announced in spring – uses its crude earning power partly to mitigate the effect of Western sanctions over its invasion of Ukraine.

That is the price Saudi Arabia pays for being the leading force within Opec+.

Its policymakers will have calculated that the benefits from continued cohesion in the group’s deliberations outweighs the hit to its own economy.

Nonetheless, economic and financial strategists in Riyadh will have to negotiate a trickier environment in the short term.

Capital Economics, a London-based consultancy, reported recently that it expected the economy to “stagnate” in 2024, breaking a two-decade cycle of expansion outside external events like financial crisis and pandemic.

The good news is that the kingdom has got plenty of resources in terms of foreign exchange reserves and fiscal policy techniques, to get through the blip relatively unscathed.

If the oil sector looks in the doldrums, at least in the short term, the same cannot be said of the non-oil economy.

Consumer activity and confidence hit all-time highs this summer, while the PMI index of business confidence is close to an eight-year high.

Visitor numbers – whether from Hajj pilgrims or highly paid footballers – are also soaring.

But budget deficit financing probably looms.

Historically, the kingdom has been reluctant to take this route. But in recent years it has shown more signs of recognising the pragmatic attraction of running small fiscal deficits – especially when backed by big foreign exchange reserves and sovereign wealth resources.

Saudi Arabia has sold $10 billion of sovereign dollar bonds this year, and there have also been reports of the impending sale of a further tranche of shares in Saudi Aramco, which could pull in something like $30 billion.

All this is against the background of debt levels most of the world can only dream about. Government debt to GDP stood at just 23 percent in June, according to CapEcon.

So there seems to be no reason for the big-ticket items of government expenditure, notably the investments in the giga-projects associated with the Vision 2030 transformation strategy, to come under undue pressure.

In footballing parlance (very much in vogue in the kingdom these days), Saudi Arabia has “taken one for the team” in global oil markets. But it still has plenty in the tank.

Frank Kane is Editor-at-Large at AGBI

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