Saudi Arabia: OPEC oil prices jump to six-month high on oil supply disruptions
May 5, 2016
Oil prices are continuing the rise as oil supply has been disrupted in key producing countries and the 17 April meeting in Doha aimed at reaching an agreement on freezing oil production was unfruitful. Against this backdrop, the price of the Organization of Petroleum Exporting Countries (OPEC) oil basket hit a nearly-six-month high of USD 42.7 per barrel on 29 April. Although this represented a 23.8% gain over the same day of the previous month, oil prices are still down 29.9% on an annual basis.
While prices fell in the aftermath of the Doha meeting, they rebounded in the following days due to a series of factors. Field maintenance in the United Araba Emirates, strikes in Kuwait and higher tensions in Libya, Iraq and Nigeria. This situation was exacerbated by the U.S. Energy Information Administration’s (EIA) recent statement that U.S. crude production will fall in 2016 and 2017. On the demand side, oil prices were encouraged by economic data suggesting that China’s economy is picking up.
In Saudi Arabia, the government is moving forward in efforts to cope with the end of the oil era. On 25 April the government’s cabinet approved Vision 2030, a multiyear blueprint for economic reform to reduce Saudi Arabia’s dependence on the black gold. The agenda calls for selling less than 5% of Aramco, which is be valued at as much as USD 2.0 trillion, in an attempt to raise the capital for the country’s Public Investment Fund.
Moreover, the Vision 2030 includes a strong increase in non-oil revenue as a result of structural reforms, cutting red tape, the creation of a large-scale defense industry, shifting the economy toward the private sector—particularly small and medium-sized enterprises—and a dramatic reduction in unemployment among Saudis. While Prince Mohammed stated that no large extra government spending will be needed to fund the Vison 2030, analysts highlighted that the plan is not clear regarding how the reforms will be implemented effectively, a factor that derailed previous initiatives. Authorities presented the most ambitious economic plan in decades against a backdrop of a sizeable drop in oil revenues, which drove the fiscal balance to record a sharp 15.0% of GDP deficit in 2015.
In an attempt to boost confidence in the new economic path led by King Salman bin Abdulaziz al Saud and his 30-year-old son, Deputy Crown Prince Mohammed bin Salman, the monarchy announced a far-reaching government shake-up on 7 May. Khaled al-Falih replaced powerful oil minister Ali al-Naimi, who has served in that position since 1995. Moreover, Central Bank governor Fahad al-Mubarak was replaced by Ahmed al-Khelaify. While this important reshuffling occurred ahead of the 2 June OPEC meeting, analysts do not foresee a meaningful change in Saudi Arabia’s oil policy.
OPEC pumped 32.25 million barrels per day (mbpd) in March, which was slightly up from the 32.24 mbpd extracted in February. According to the latest OPEC Monthly Oil Market Report, March’s increase in output mainly reflected much stronger production in Iran and, to a lesser extent, in Angola and Iraq. On the other hand, Libya, Nigeria and the United Arab Emirates recorded significant production declines in the same month. Saudi Arabia produced 10.12 mbpd in March, which matched the result tallied in the previous month.