Is Saudi Arabia preparing a surprise for next fall?
According to the latest IMF World Economic Outlook, recent production cuts by Saudi Arabia are starting to take their toll on the country's economy. The Kingdom's GDP growth projections for 2023 have been significantly reduced and are now expected to reach just 1.9%, down from 3.1% previously forecast in May.
The IMF attributed this downgrade to production cuts announced in April and June under the OPEC+ deal. Despite efforts to diversify the economy under Vision 2030 , Saudi Arabia remains heavily dependent on hydrocarbon revenues, with the impact of oil market developments continuing to outpace the growth potential of non-hydrocarbon sectors.
While the Kingdom has made great strides in economic diversification, all new projects, including the ambitious Giga-Projects, continue to be tied to oil and gas funds. Aramco's strong revenue base remains critical to the engine of economic activity. While this analysis may not appeal to Saudi officials, the IMF downgrade could be followed by similar reactions in financial markets that want earnings, not empty promises.
Was the production cut useful for Arabia?
The unilateral production cut presented by Saudi Energy Minister Prince Abdulaziz bin Salman and extended at the recent OPEC+ meeting is now showing negative consequences. The Kingdom's official position is that Riyadh is the only entity capable of controlling and stabilizing the markets, especially oil prices. However, many analysts have expressed skepticism about the real motivations behind the Saudi move, given that a tighter supply-demand situation is expected in the second half of 2023. For many, the cut was unnecessary, and some countries, such as the United Arab Emirates, refused to implement it.
The effect of the cut on the price was dubious, and the recent increase was more due to growth prospects for Chinese demand, which is now at risk of falling after natural disasters, rather than output cuts. Furthermore, there is the risk of uncontrolled swings if demand tightens again.
Saudi Arabia's progress in economic diversification projects requires more foreign direct investment (FDI) and higher government revenues, as well as access to international financial markets. The IMF report questioned these aspirations. With the MENA region posting lower GDP growth projections and some countries facing financial crises, Saudi Arabia needs to reevaluate its near-term economic strategies.
Arabia could take a bath in realism and reserve surprises
Non-oil GDP growth is robust, but cannot fully compensate for the current dependence on oil revenues . The low inflow of FDI in the first quarter of 2023 is a cause for concern, especially when compared with the expectations set out in Vision 2030.
Market analysts and the media should closely monitor Riyadh's shares in the coming weeks, as a significant change could be on the horizon. While no immediate changes are expected at the next JMCC meeting, an increase in Saudi production before October 2023 is highly plausible. Signs of renewed supply and demand contraction in oil and petroleum product storage volumes, coupled with positive indicators in Asia, Europe and the US, could lead to a dramatic shift in the Kingdom's strategies on production volumes .
A surprise move may be in the works to keep oil prices from going above $90-100 a barrel in the fourth quarter. Even if the media are unaware of it, it is likely that Crown Prince Mohammed bin Salman and his brother are preparing a new Saudi surprise after the summer season. However, this would put a crack in relations with Russia, but the damage deriving from an excessive tightening of the oil market could be greater.
There are countries that are returning to the international market, such as Libya, which could permanently erode Saudi quotas. There are countries, such as Venezuela, which could see their quotas released, Suriname and Guyana are entering the market, and the USA has shown an enviable production elasticity. The surprise Saudi move, an increase in production, could mitigate these dangers to the kingdom's revenues in the long run.
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The article Is Saudi Arabia preparing a surprise for next fall? comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/larabia-saudita-sta-preparando-una-sorpresa-per-il-prossimo-autunno/ on Sun, 06 Aug 2023 08:30:29 +0000.