Will Saudi Arabia really extend the production cuts beyond December?

 

Falling profits of Saudi Aramco - 2023
Falling profits of Saudi Aramco - 2023

Aramco, the Saudi national oil company and the world's second largest company by revenue, reported 23% fall in year-on-year profit on Tuesday; in 2022, however, it made a record profit of just over $161 billion that is more than those of Google, Microsoft and Amazon combined for the same period.

The fall in profit by a substantial margin has been attributed to the fall in oil price and of course, a drop in production: Saudi Arabia has been instrumental in reducing the global output by 1 million bpd - barrel per day - on its own; Russia has made a similar move with half a million bpd cuts in a show of solidarity with the de-facto leader of the OPEC+, Saudi Arabia. 

The significant combined production cut, of course, led to a spike in oil prices perfectly in line with the most basic law of economics - supply and demand; the two benchmarks, WTI and Brent, went above $80 and $90 respectively, only to come down sharply this week.

The rise in oil prices resulted in the rise in inflation that in turn slowed down the global growth. Understandably, the slow economic growth in turn became a drag on the global demand. 

China, for instance, saw its manufacturing activity shrinking in October and in proportion to  it, the Chinese demand of the commodity has fallen. Since China is the second largest importer of the crude oil, the market sentiment turned sour in November that in turn brought the price of crude oil down by over $6 this month.

Even a calamity in the most important region, as far as crude oil production is concerned, could not push the prices up, despite the lingering anxiety over its potential spillover to the rest of the region.

Neither did the anticipated reduction of the Iranian oil in the international markets due the bill, SHIP - Stop Harboring Iranian Petroleum -  passed by the US House of Representatives that could penalize any refiner or port that deals with the commodity from Iran.

Falling oil prices may have played a role in the fall in price of LNG, liquified natural gas too.

As of 18:00 GMT, the prices of WTI, Brent and LNG were at $77.17, $81.43 and $3.03 respectively.

Falling oil prices - November
Falling oil prices - November



As far as Saudi Arabia, the world's top exporter of crude oil is concerned, there was a certain development to assume that the Kingdom knew what was in the offing; the Saudis left the price of light crude for Asia unchanged so that its traditional customers would not hesitate to buy oil from the Saudis; they know that customer loyalty is something that could not be taken for granted when the volatility is rife in the energy markets.

Hardeep Singh Puri, the Indian oil minister, for instance, has been on record that in the event of Venezuela offering oil at cheaper price, India would not think twice before choosing its suppliers. This is exactly what India did when Russia offered oil at significant discounts just after the war broke out, in spite of potential sanctions by the West. 

As for the imports from Russia and Venezuela, India is facing real logistical problems, though - the high shipping and insurance costs due to the distance involved. If Indian turns to Saudi Arabia, the costs can be substantially minimized, if the latter refrains from raising the prices on a whim. 

The falling oil prices causing quite a stir in the Kingdom of Saudi Arabia, as they can erect quite a few stumbling blocks when the latter embarks on several ambitious projects for a world that does not solely on petrodollars. 

If the price of oil keep falling further, it will face a dilemma in December when the current production cuts are supposed to end; it can extend it again, but whether it will lead to price hikes, judging by what happened with the latest cuts, is anyone's guess.

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