Last week, eight OPEC+ countries unveiled plans to advance their planned phase-out of voluntary oil output cuts by ramping up output by 411,000 barrels per day in May--equivalent to three monthly increments. The announcement of the accelerated unwinding clip comes at a time when U.S. President Donald Trump announced tariffs on trading partners, deepening the shock to oil markets. Brent crude for June delivery was up 0.1% to trade at $63.32 per barrel at 9.45 am ET on Friday while WTI crude was flat at $60.12 per barrel.
The move confirms previous rumors that Saudi Arabia could be willing to abandon its traditional role as OPEC’s swing producer as it looks to make a strong statement against production-cut violators such as Kazakhstan, United Arab Emirates and Iraq.
Last September, the Financial Times reported that Saudi Arabia was ready to abandon its unofficial price target of $100 a barrel for crude oil as it prepares to increase output, effectively signaling that it is resigned to a prolonged period of lower oil prices. Saudi Arabia currently accounts for 2 mb/d out of 2.8 mb/d output cuts from OPEC members and a total of 3.15 from OPEC+. Essentially, the Saudi contribution is double that of the entire group, with only the Kingdom and Kuwait currently cutting production by a double-digit percentage. In fact, a big part of lower output by other OPEC+ members is not voluntary but rather reflects their inability to meet their quotas.
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However, dumping more oil on the markets comes at great cost for OPEC’s biggest producer. According to the IMF, Saudi Arabia, the GCC’s biggest economy, needs an oil price of $96.20 per barrel to balance its books, thanks in large part to MBS’ ambitious Vision 2030. The situation is not helped by the fact that over the past few years, the oil-rich nation has borne the lion’s share of OPEC+ production cuts. The kingdom is currently pumping 8.9mn b/d, the lowest level since 2011. In effect, Saudi Arabia has been selling less oil at lower prices, thus compounding the revenue shortfall.
That said, the Saudis can still afford to inflict some pain on oil markets. As OilPrice.com contributor Irina Slav has noted, Saudi Arabia can simply slam the brakes on Crown Prince Mohammed bin Salman’s Vision 2030 economic plan, maybe turn it into Vision 2040 or even Vision 2050 if oil markets refuse to cooperate. Further, Saudi Arabia has enough alternative funding options to weather a period of lower prices, including tapping foreign exchange reserves or issuing sovereign debt.
And now the experts have suggested that Saudi Arabia could also take advantage of the low tariff rates that Trump slapped on GCC nations by becoming a regional manufacturing powerhouse. All six Gulf Cooperation Council (GCC) nations namely Saudi Arabia, the United Arab Emirates, Bahrain, Qatar, Kuwait and Oman will only pay 10% tariffs.
"As tariffs rise in certain countries, we are likely to see a growing shift of business to the GCC [Gulf Cooperation Council], whether through nearshoring or friendshoring," Adel Hamaizia, a Gulf expert at the Harvard Belfer Center Middle East Initiative, told Middle East Eye.
“Saudi Arabia should be sending their trade representatives to the Trump administration right now, asking, ‘What was China providing you. Tell us what it is and we will make it in Saudi Arabia and provide a great trade deal',” Ellen Wald, founder of the energy consulting firm, Transversal Consulting, told MEE.
Incidentally, manufacturing is part of Vision 2030. The oil giant has a major advantage here: unlike Europe, Saudi Arabia is endowed with lots of cheap energy, plenty of open space and minimal regulations.
Further, Saudi Arabia is accelerating its $2.5 trillion mining plans to diversify its economy and reduce its reliance on oil, while simultaneously investing in technologies to optimize oil production and reduce carbon emissions. Mining now plays a central role in Riyadh’s strategy to reduce oil dependency, with the country looking to exploit its significant reserves of phosphate, gold, copper and bauxite. Last year, Saudi Arabia’s mining minister, Bandar Al-Khorayef, revealed that the Kingdom’s reserve potential had grown by nearly 90% from the $1.3 trillion forecasted eight years ago to $2.5 trillion. Saudi Arabia has set a goal to increase the mining industry’s GDP contribution from $17 billion to $75 billion by 2035.
Last year, the Kingdom signed nine investment deals in metals and mining worth more than 35 billion riyals ($9.32 billion) as it looks to build domestic supply chains for critical metals. The country’s Global Supply Chain Resilience Initiative unveiled the deals with Indian mining conglomerate Vedanta and China's Zijin Group.
By Alex Kimani for Oilprice.com
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