A Saudi Aramco production site
A Saudi Aramco production site. Source: Bloomberg

THE NEUTRAL ZONE

Oil prices fluctuated but ultimately fell on Monday following Saudi Arabia’s announcement that it will cut oil production to bolster crude prices in the face of the coronavirus crisis. The cost of oil, currently down 50 percent year-to-date, had declined prior to the outbreak due to “record levels of supply” from Saudi Arabia and its allies.

Saudi Arabia said it would reduce production by 1 million barrels per day. This reduction, in combination with OPEC-approved cuts in production, amounts to a nearly 5 million barrel-per-day decrease from April’s record production. June production is expected to be 7.5 million barrels per day.

A “triple-blow” to the national economy – declining oil prices, a stagnant economy, and increased healthcare costs due to coronavirus care – forced Saudi Arabia to cut its budget. The country continues to rely heavily on oil revenue, despite attempts to diversify the economy. The country will triple its value-added tax to 15 percent as of July 1 to boost the national economy. Additionally, cost-of-living allowances for state employees will be suspended as of June 1.

Saudi Aramco, formally known as Saudi Arabian Oil Company, one of the country’s largest oil producers, is weighing cutting its dividend to the government after its Q1 earnings report. The company originally promised the Saudi government $75 billion annually for their first five years to attract investors to their IPO last December.

MEDIA PERSPECTIVE

Saudi markets reel after government announces dramatic tripling of VAT – The New Arab – 5/11/2020
Saudi shares plummeted early on Monday after the government rolled out a series of drastic measures to control the devastating economic impact of coronavirus and a drop in oil prices. […] In a statement he said the “painful” moves were “necessary and beneficial to protect fiscal and economic stability in the short and long term”. Immediate shock waves swept through Saudi markets, the Tadawul all share index – the largest capital market in the MENA region – fell as much 3.5 percent in Riyadh.

Oil prices fail to find support even as Saudi Arabia announces additional June output cut – MarketWatch – 5/11/2020
Oil futures traded lower on Monday, as a slump in demand for crude outweighed support from a move by Saudi Arabia to further cut production in June. Saudi Arabia’s energy ministry directed Saudi Aramco to reduce its crude-oil production by an extra, voluntary 1 million barrels per day beginning in June, a Saudi Ministry of Energy official told the Saudi Press Agency, according to an article dated Monday.

Saudi, UAE, Kuwait extra cuts mean oil storage capacity will not be exceeded: Experts – Al Arabiya English – 5/11/2020
An extra 1.2 million barrel per day (bpd) cut will not re-balance the market, but will surely remove strain from the storage infrastructure and buy time to wait for the demand rebound, said Paola Rodriguez Masiu, Rystad Energy’s Senior Oil Markets analyst. “Before this news broke, we were expecting global onshore stocks to build by an astonishing 9 and 3 million barrels per day during May 20 and June 20, respectively, really pushing the limits of the available storage capacity,” she said.

Getting Rid of the Saudi Burden for Good – The American Conservative – 5/11/2020
Some commentators responded that the U.S. should use its leverage more often in order to accomplish other foreign-policy goals. Yet beyond the question of leverage, the incident reveals the dysfunction of the U.S. relationship with Saudi Arabia, where the increasingly blatant absence of mutual interests results in a strategic partnership kept afloat through ultimatums.

INFLUENCER PERSPECTIVE

Dan Graeber on Twitter, 5/11/2020: “As oil goes, so too goes the global hierarchy of power.”

Natasha Turak on Twitter, 5/11/2020: Saudi Arabia’s austerity drive — which includes tripling VAT — is being called ‘decisive and necessary,’ but it risks delaying a consumer recovery #SaudiArabia

Paul Wallace on Twitter, 5/11/2020: #SaudiArabia cuts #oil output again — this time to the lowest since 2002 — as the kingdom’s budget reels. Crude prices initially spiked, but are now down on the day. Brent’s just under $30 a barrel. @JavierBlas

Stephen Kalin on Twitter, 5/11/2020: “5% was already a lot for many customers. They come in, see the VAT, put the piece back on the counter & leave,” said a jewelry salesman in Jeddah. “15% is just too much. They are going to cause a fit in our stores when we tell them.” w/ @donna_abdulaziz

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