Early June saw OPEC+ extend its 3.66 million barrels per day (bpd) of production cuts to the end of 2025.
It also announced that it would extend another 2.2 million bpd to the end of September 2024. Together, these cuts comprise around 5-6% of global oil demand. Despite this, though, the Brent oil price global benchmark has failed to break through the key US$90 per barrel (pb) level that was last achieved in September.
This means that the two prime movers in the OPEC+ alliance – Saudi Arabia and Russia – are way off the oil price needed to balance their budgets. So will they cut production even more?
It is a common misconception that Saudi Arabia is awash with oil money. This is not true at all, as the Kingdom is now battling with a 2024 fiscal breakeven Brent oil price of US$96.17 pb. It has forecast a budget deficit this year of SAR79 billion (US$21.07 billion), which many oil market observers believe to be extremely optimistic. As in all situations where expenditure is greater than revenue, this situation will only become worse from here. Part of the problem is that the country has never fully recovered from the 2014-2016 Oil Price War or the short-lived 2020 Oil Price War, both of which are analysed in full in my latest book on the new global oil market order. These two wars were aimed at destroying or at least seriously disabling the then-nascent U.S. shale oil industry, which the Saudi correctly saw as a direct threat to its key oil sector, and therefore to its power in the world. By dramatically increasing production from itself and from its OPEC brothers, Saudi Arabia intended to crash oil prices for long enough that the still-developing U.S. shale sector would see a high percentage of bankruptcies, with those few companies left taking years to recover. Unfortunately for it, the U.S. shale sector demonstrated an extraordinary ability to reorganise itself quickly into a lower-cost industry able to withstand much lower prices than any other producers, including those in Saudi Arabia and OPEC. As a result, it was the latter two players that suffered financially, to the tune of well over US$450 billion in collective lost oil revenues over that two-year period, according to the International Energy Agency, although other commentators believe it to be at least double that figure. Over the course of the 2014-2016 Oil Price War, Saudi Arabia moved from a budget surplus to a then-record-high deficit in 2015 of US$98 billion and spent at least US$250 billion of its foreign exchange reserves over what many senior Saudis said had been lost forever.
Another part of the problem is the country’s spending history on various social projects that subsequently spiralled dramatically. These include US$5 billion spent on ship repair and building complex on the east coast, and billions contributed towards the US$23 billion King Abdullah University of Science and Technology. Other projects saw spending estimates spiral even more out of control, most notably the flagship Neom City development. Initially-costed at US$1.5 trillion the linear city project located has been cut back in size from 106 miles long to just 1.6 miles long. Added to these huge overspends, the ill-received Aramco initial public offering in December 2019 meant that the Saudis had to commit to a massive dividend expenditure to sweeten the flotation. More specifically, it guaranteed a US$75 billion dividend payment in 2020, which then rose in 2023 to US$97.8 billion. For 2024, Saudi Aramco expects to pay US$124.3 billion in dividends.