Saudi Arabia’s decision to cut its oil output by 1 million barrels per day (bpt) in July could lead to a contraction of its economy this year, according to some analysts.
The kingdom’s energy ministry said on Sunday that it would reduce its production to 9 million bpd in July from around 10 million bpd in May, the biggest reduction in years as the country and other producers seek to shore up flagging oil prices.
However, the move could also have negative consequences for Saudi Arabia’s gross domestic product (GDP), which is heavily dependent on oil revenues.
Capital Economics, a research firm, forecasts that Saudi Arabia’s economy will shrink by 0.5% this this year, down from its previous estimate of 1% growth.
“Despite the production cut, we still expect the kingdom to run a budget surplus this year. It sees the kingdom’s breakeven oil price at $80 a barrel. And we have left out end-year Brent crude price forecast unchanged at $90pb for end 2023, just that prices may be a little more elevated in the interim than we had envisage”, James Swanston, emerging market economist at Capital Economics, said.
Monica Malika, chief economist at Abu Dhabi Commercial Bank, said that if the production cuts are maintained from July to end-2023, it would result in a GDP contraction.
“We estimate that if the 1.0 million b/d oil production cut is only maintained for July, it will reduce Saudi Arabia real headline GDP growth by c.0.3 percentage points. However, if it is extended for the remainder of the year (i.e. July to December), we estimate it will lower Saudi Arabia’s headline GDP growth by 2.0 percentage points”, she said.
Malik had previously forecast GDP growth 1% for Saudi Arabia in 2023 and a fiscal breakeven price of $86.3 a barrel.
The production cut by Saudi Arabia come as a surprise to many analysts and traders, who expected the OPEC+ group of oil-producing nations to maintain their current output levels until next year.
OPEC+, which includes Russia and other non – OPEC members, agreed on Sunday to extend their earlier cuts in supply through the end of 2023. The group is responsible for about 40% of the world’s oil supply.
The move was aimed at supporting oil prices, which have fallen amid concerns over the global economic backdrop and weak demand due to the COVID-19.
Brent crude, the international benchmark for oil prices, gained more than 2% on Monday morning to touch a one-month high of $78.73 a barrel, before dipping back.
However, some analysts warned that the supply cuts may not be enough to offset the demand weakness and the rising output from other producers such as the US and Iran.
“Oil prices are still in a bear market, and we can see that some advanced economies have already started to fall into recession such as Germany”, CMC Markets analyst Leon Li said.
