Saudi Arabia will unilaterally cut an extra 1 million barrels of oil production per day from June in a renewed effort to stabilize global energy markets.
The Kingdom’s energy ministry told Saudi Aramco to further reduce the output level beyond the historic reductions agreed with OPEC+ countries last month, bringing the total the Kingdom is pledged to reduce to nearly 5 million barrels a day.
From next month, Saudi Arabia will produce only 7.5 million barrels, the lowest in two decades and well below capacity of more than 12 million barrels.
“We want to expedite the process of returning back to normal,” Energy Minster Prince Abdul Aziz bin Salman said.
An energy ministry official said the new cut was intended to “encourage” other members of the OPEC+ alliance, which includes Russia, to implement the cuts they have already agreed on. The UAE and Kuwait signaled they were ready to follow the Saudi cuts with smaller cuts of their own.
OPEC+ will debate a possible extra round of cuts next month as the global oil glut continues.
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Some analysts saw the new cuts as an attempt to help the struggling American shale industry, which has been hit by closures and bankruptcy after the oil price collapse.
But Brent crude, the global benchmark, fell 3.4 percent after the announcement to $29.50, with West Texas Intermediate, the American standard, also down at $24.21 per barrel.
The move in the global oil market came after Saudi Arabia took drastic measures to overhaul its finances amid the global economic shock of the coronavirus pandemic.
The value added tax will be tripled to 15 percent, cost of living allowances for government employees cut, and capital spending on some big projects reduced or delayed.
But megaprojects such as NEOM and the Red Sea Development, core parts of the Vision 2030 reforms, will carry on.
“It may not be as fast as it used to be, but they are continuing,” Finance Minister Mohammed Al-Jadaan said.
The increase in the VAT, bigger than the IMF has called for in the past, would add to the cost of living, but Al-Jadaan said the effect would be minimal because coronavirus lockdowns would depress consumer spending.
Some analysts said the measure was a return to “austerity” economics amid the global recession caused bythe pandemic. Tarek Fadlallah, chief executive of Nomura Asset Management in the Middle East, said: “The subtle approach to diversifying the Saudi economy and raising non-oil revenues has been too slow.
“The authorities have accepted the need to induce a painful and immediate overhaul of the economy in the hope of longer-term gains.”