Having rejected production freeze, Saudi Arabia is now waiting out the oil market situation

10 june 2016 | IA REGNUM

“As Saudi Arabia decided to freeze its oil output at the current level until 2020, the niche for other Middle Eastern oil producers in the global market is getting bigger,” the Head of the Department for Strategic Studies in Energy of the Analytical Center Alexander Kurdin told a REGNUM correspondent.

Alexander Kurdin
Alexander Kurdin
Department for Fuel and Energy Sector

“Saudi Arabia does not expect to see a substantial increase in output after 2020 any way. For example, the International Energy Agency predicted last year that between 2020 and 2030 the increase in oil output in the country will be 0.8 million barrels a day in 10 years, meaning that annually growth will be 0.6% only. The production freeze would somewhat expand niches for other Middle Eastern players,” the expert explained to the publication.

Mr. Kurdin also noted that the production freeze the Saudi government decided on may result in a slight shortage of oil, pushing the prices up a little bit. However, even if that happens, no significant changes in the global oil market are expected to happen, the expert pointed out.

On June 6 Saudi Arabia decided to reduce its dependence on oil exports and approved a national transformation program, under which by 2020 oil output is to be frozen at 12.5 barrels a day. This begs the question why is it then that Saudi Arabia did not agree to a production freeze at the negotiations in Doha. Mr. Kurdin believes the reason is the different goals Saudi oil companies are aiming for.

“They are looking at different timeframes and different goals. The decision not to freeze production in the next two years is a tactical move: the Saudis do not want to save other oil exporters, they just want to sit and wait until some kind of an equilibrium reemerges in the market naturally, at an acceptable price point, purely as a result of fundamental market factors,” Mr. Kurdin said.

The expert also noted that in effect Saudi Arabia is not increasing production either. The kingdom is simply waiting out the situation, making sure none of its partners and competitors can take advantage of it for political purposes. In the meantime, freezing domestic production at the same level after 2020 is a strategic move aimed at boosting domestic economic development and diversification, the expert believes.

“And the real timeframe and parameters of the implementation of this strategy are going to depend on the state of the economy. Any international obligations restricting the kingdom’s freedom of action in this regard would be ill-advised in this situation,” Mr. Kurdin summed up.