Saudi Arabia promises to cut oil output for months and years to come

Saudi Arabia has kept to its word and cut oil output by 486,000 barrels per day as part of the OPEC agreement made in October 2016. The agreement has helped oil prices to stabilise at over $50 per barrel. Fracking for tight oil (also known as shale oil or light tight oil) has entirely changed the economics underlying the entire global oil market. OPEC knows that it must watch American fracking production closely to keep oil prices competitive. Saudi Arabia’s output cuts are just the beginning of a trend that is expected to last for months, possibly years to come, irrespective of the rise of American fracking. OPEC learned a lesson that it must be competitive on price with American fracking - which has demonstrated survival at very low prices. Moreover, leaders of Riyadh (the capital and most populous city of Saudi Arabia) don’t want to upset the new Washington administration by going to war on American frackers. Riyadh has a plan to sell shares of state-owned company Aramco to the public. The Aramco IPO will help finance its vision 2030, to make the Saudi economy less dependent on oil.

Limited Resources

There is however one major floor in this grand plan. Despite Saudi boasting the Ghawar oil field has enough reserves to fill 4,770,897 Olympic swimming pools, the Kingdom may be running out of oil faster than previously thought. Its major oil fields are now ageing and new untapped fields are hard to come by. Due to the tight lipped nature of Saudi it is very difficult to substantiate the Kingdom’s oil reserves. If the oil reserve numbers are true, it means that Saudi Arabia’s supply of oil could last another 90 years at current production rate. For now Saudi’s output cuts contribute to the stabilisation of oil prices at between $50 and $60. The unknown factor is whether the world economy will grow fast enough to absorb supply from the oil and fracking markets.