Saudi Aramco, the world’s largest oil company, shocked the energy market today by announcing it has suspended plans to increase its maximum crude oil production capacity beyond 12 million barrels per day (bpd) by 2027.
Aramco Receives Directive from Saudi Government
The surprise decision came after Aramco received an official directive from the Saudi Arabian government to halt the capacity expansion to 13 million bpd, according to a company statement.
Saudi Crown Prince Mohammed bin Salman first announced ambitions to lift Aramco’s capacity to 13 million bpd from 12 million bpd in March 2019. The move was part of a broader strategy to make Saudi Arabia a dominant player in global oil markets. However, the kingdom has now backtracked on that plan amid uncertainty over long-term oil demand.
The U-turn reflects concerns within OPEC’s de facto leader about long term demand as the world transitions to renewable energy, according to Saudi government sources cited by the Financial Times. It also underscores the kingdom’s commitment to supporting prices after the turmoil during COVID-19 lockdowns.
Market Reaction
Oil prices jumped around 2% following the surprise Aramco announcement. Brent crude hit $87 per barrel, extending strong gains so far in 2024 after last year’s downturn.
The news reassures markets that Saudi Arabia is keen to defend prices despite fears of weakening global oil demand growth on recession worries in major economies like the U.S. and China.
Aramco shares also rallied over 2% on the Saudi Stock Exchange after losses of nearly 7% earlier in 2024. Investors are breathing a sigh of relief that Aramco won’t pursue risky investments in new production capacity amid uncertain market conditions.
| Change | Price | % Change |
|---|---|---|
| Brent Crude Oil | $87 | +2.1% |
| Aramco Share Price | 45.30 | +2.3% |
Background
Saudi Arabia has traditionally adjusted OPEC’s oil production levels to balance global markets and support prices. The kingdom often cuts its own output to offset oversupply from other major producers like the U.S.
Crown Prince Mohammed bin Salman originally wanted Saudi production capacity raised to challenge the growing U.S. shale oil sector. But in recent years the focus has shifted back to supporting prices and market stability.
Aramco was already struggling to hit its 12 million bpd maximum capacity target last year amid heavy investment demands. Analysts questioned whether the Saudi giant had the engineering prowess and funds to expand output much further.
The energy transition away from fossil fuels has also deterred major oil companies from approving big capacity increases. Peak oil demand may already be behind us.
Outlook
With the capacity increase now on ice, Saudi Arabia has effectively abandoned plans to pump all-out for market share. Instead its priority is to keep oil prices high enough to fill state coffers, while not so high as to trigger a collapse in demand.
OPEC+ is likely to continue carefully managing global supply levels with its production quota system. As the lowest cost producer, Saudi Arabia will cut output when required to offset increases from rivals like American shale drillers.
Aramco can redirect freed up funds to dividends and its big acquisition of Saudi chemical firm SABIC. However, the halted expansion is negative for international oil services firms that were eyeing lucrative Saudi contracts.
Climate change commitments mean increased Saudi production was always a long shot. This policy shift cements peak oil supply and likely brings forward the peak demand tipping point that ultimately renders new production capacity redundant.
The abandoned capacity increase plan highlights that traditional petrostates realize the oil era approach endgame. While still heavily reliant on oil income, Saudi Arabia has launched an economic reform and diversification drive to prepare for a low carbon future.
Aramco remains incredibly profitable on pumped volumes even below 12 million bpd. However, its valuation dream of a $2 trillion IPO is fading as investors turn away from fossil fuels. The halted expansion project suggests Saudi Arabia recognizes oil’s golden age is drawing to a close.
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