Saudi Aramco’s Production Capacity Goal Revised

The recent decision by Saudi Aramco to reduce its production capacity goal, under the guidance of the Saudi Arabian government, has had a significant impact on oil services stocks. This move raises concerns that oil services companies may be left with unused equipment in the near future.

Notably, industry leader SLB experienced its largest drop since May 2022, with an 8.6% decline. Additionally, Halliburton, Subsea 7, and Saipem saw their stocks drop by 3.1%, 5.2%, and 2.1% respectively.

As a result of this development, global oil prices also experienced a decline of 0.4% to $82.11 per barrel. Similarly, the Energy Select Sector SPDR Fund experienced a decrease of 0.5%.

Before trading began on Tuesday, state-owned Saudi Aramco announced that it would not pursue an expansion of its production capacity to reach 13 million barrels per day. Although this decision does not immediately impact current oil production, its implications are significant.

Saudi Aramco, officially known as Saudi Arabian Oil Co., had initially set the goal of reaching 13 million barrels per day in 2020, with a focus on offshore drilling. Preparation had already begun, including securing contractors for the project.

As of now, there has been no response from Aramco or the companies involved in the expansion projects. Aramco has stated that it will provide an update for its investors in March.

Although the impact on commodity prices has been relatively minor, investors have displayed growing concern, as evidenced by the reaction of oil services stocks.

Saudi Arabia, holding the world’s second-largest oil reserves after Venezuela, seems to be signaling concerns about future demand by slowing its growth plans.

Furthermore, Saudi officials have acknowledged that countries like the United States and Brazil have been expanding their oil production capacities at a faster rate than anticipated by analysts.

In fact, the United States is currently producing record amounts of oil, with daily production reaching 13.2 million barrels. Brazil is also actively increasing its production, and drilling activities are on the rise in other countries such as Guyana.

The Changing Dynamics of Oil Prices

With an influx of capacity entering the market, the fear of prices crashing has become a significant concern. To address this issue, Saudi Arabia, along with OPEC+ (which includes Russia and other non-OPEC allies), has implemented production curtailments to maintain high prices and stabilize the market.

Currently, Saudi Arabia produces approximately 9 million barrels per day, similar to its output during the Covid-19 restrictions in 2020. However, despite these efforts, oil prices have remained relatively stable, with U.S. oil prices briefly dropping below $70 per barrel. The demand is struggling to keep pace with supply, despite modest global economic growth.

Citi analyst Alastair Syme describes Saudi Arabia’s decision as a “significant strategic shift,” suggesting that OPEC+ acknowledges the problem at hand. This problem pertains to the growing capacity surplus in global oil markets, requiring Saudi Arabia to cede market share to accommodate the growth of competitors such as U.S. shale, Guyana, and Brazil.

Syme forecasts that Saudi Arabia’s production cuts will help maintain oil prices above $70 per barrel. He believes that the market should assume Saudi Arabia’s determination to defend this price level, also known as “the OPEC+ put,” at all costs, at least in the short-term.

As a result of Saudi Arabia’s limited production and efforts to sustain high prices, major U.S. producers like Exxon Mobil and Chevron, as well as Brazil’s Petrobras, are poised to benefit. These companies now have the freedom to increase their output without the constant worry of crashing the market.