Saudi Arabia Cuts Production by 1 Million Barrels... Lowest Output in 18 Years

"Starting Next Month, Daily Production to Reach 7.5 Million Barrels" Sudden Announcement
WTI Drops 2.4% Amid Concerns of Second COVID-19 Wave

[Asia Economy Reporter Naju-seok] Saudi Arabia has abruptly announced additional production cuts. International oil prices fell due to concerns over the second wave of the novel coronavirus infection (COVID-19).

On the 11th (local time), Saudi Arabia announced that it would reduce daily crude oil production from 8.5 million barrels to 7.5 million barrels starting in June. This is the first time in 18 years since 2002 that Saudi Arabia has lowered its daily crude oil production below 8 million barrels. Neighboring oil-producing countries such as Kuwait and the United Arab Emirates (UAE) also decided to reduce their daily crude oil production by 80,000 barrels and 100,000 barrels, respectively.

Saudi Arabia’s production cut announcement came immediately after it declared plans to implement austerity measures due to worsening fiscal conditions. With the country’s coffers emptying due to decreased demand and falling oil prices, the plan is to further reduce oil production to raise prices. It also intends to induce additional production cuts from other oil-producing countries. Saudi Energy Minister Abdulaziz bin Salman explained, "Saudi Arabia’s voluntary production cut decision will accelerate the rebalancing process of the oil market."

Saudi Arabia’s recent decision shows a significant difference from last month. In March, it engaged in an oil price war with Russia and increased daily crude oil production to a record high of 12.3 million barrels. However, as oversupply continued to cause oil prices to plummet without bottoming out, Saudi Arabia shifted direction toward production cuts. With this additional cut, Saudi Arabia’s oil production will decrease by 4.8 million barrels per day over two months.

The production cuts have also worsened Saudi Arabia’s treasury situation, which had relied on oil sales for fiscal revenue. On the same day, the Saudi Ministry of Finance announced austerity measures including cuts in subsidies and other fiscal expenditures, and an increase in the value-added tax rate from 5% to 15%.

This production cut announcement appears to have been coordinated in advance with the United States. According to Bloomberg News, before the announcement, King Salman bin Abdulaziz Al Saud of Saudi Arabia spoke with U.S. President Donald Trump. The White House explained regarding the call, "The two leaders agreed on the importance of stabilizing the global energy market."

The market expects that additional production cuts by Saudi Arabia and others will buy more time before global oil storage tanks reach full capacity, known as "tank tops." Norwegian energy consulting firm Rystad Energy analyzed, "(The additional 1.2 million barrel cut by Saudi Arabia and two other countries) will not rebalance the oil market, but it will reduce concerns about oil storage capacity and buy time until demand recovers."

Despite the unexpected Saudi production cut announcement, international oil prices fell. On the same day at the New York Mercantile Exchange (NYMEX), June delivery West Texas Intermediate (WTI) crude oil closed at $24.14 per barrel, down 2.4% ($0.60). WTI had risen to $25.58 on the surprise production cut news, but concerns over a second wave of COVID-19 infections in countries including South Korea and Germany caused prices to fall to as low as $23.67.

This content was produced with the assistance of AI translation services.