Saudi Arabia has cast doubt on the future of the global oil market after abandoning plans to grow its crude production capacity by 1m barrels a day.
The world’s biggest exporter signalled a big change in policy by ordering the state oil company, Saudi Aramco, to drop plans to expand its maximum production capacity to 13m barrels a day by 2027.
The decision has raised questions over the future of global oil demand growth, weeks after an influential report found that a worldwide peak in crude demand could come before the end of this decade.
The International Energy Agency said that the faltering global economy would slow the world’s growing demand for oil from this year, before the take-up of electric vehicles in the second half of the decade causes consumption to reach a peak.
Riyadh’s order to drop Aramco’s expansion plans is expected to “cause reverberations across the energy complex”, and has already “triggered much speculation on the potential implications on global oil demand over the medium and long term”, according to Biraj Borkhataria, an analyst at RBC Capital.
The move may also help to support the flagging oil markets in a blow for the US president, Joe Biden, who would benefit from weaker pump prices ahead of the election later this year.
The benchmark oil price is about $81 a barrel, narrowly below the average price during 2023, despite the conflict between Israel and Gaza that erupted in October and a significant escalation in attacks on vessels in the Red Sea.
In response, Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries (Opec) have agreed to hold back more than 1m barrels of oil production a day to help prop up prices.
Saudi Arabia produced about 9m barrels of oil a day last year, enough to meet almost 10% of the world’s demand, but it has the capacity to produce up to 12m. In the past, the Saudi crown prince, Mohammed bin Salman, has claimed that the kingdom could increase its capacity to 20m barrels a day.
The decision to scrap plans to expand its capacity could “suggest that Opec+ is beginning to recognise it has a problem”, according to analysts at Citi. They added that it represented “a huge rethink of strategy and will have wide ramifications to Aramco capital spending, the Gulf supply chain and of course Opec+ oil policy”.
The crown prince called for the multibillion-dollar expansion plan in 2020 in a show of strength as the global oil market began to falter in the face of the Covid-19 pandemic.