Saudi Aramco’s pullback of a million barrels on its production capacity goal—at the direction of the Saudi Arabian government—was hitting oil services stocks hard on Tuesday. If a major oil producer reduces its goals, oil services companies could be left with idle equipment in a few years.
Industry leader
SLB
fell 8.6%, its largest drop since May 2022.
Halliburton,
Subsea 7,
and
Saipem
were down 3.1%, 5.2%, and 2.1%, respectively.
Global oil prices were down 0.4% to $82.11 a barrel, and the
Energy Select Sector SPDR Fund
was down 0.5%.
Before the stock market opened on Tuesday, the state-owned Saudi Aramco announced it won’t expand its production capacity to 13 million barrels a day from 12 million.
The move has large implications, even though it doesn’t impact oil production right now.
Aramco, known officially as Saudi Arabian Oil Co., had set the 13 million-barrel goal in 2020, with expansion focused on offshore drilling. The company had even started to line up contractors.
Aramco and several companies involved in the projects didn’t immediately respond to requests for comment. Aramco said it would update investors in March.
Although the dip in the commodity price was modest, investors are clearly nervous, given the reaction from oil services stocks.
Saudi Arabia has the second-most oil reserves in the world after Venezuela, and its decision to slow growth seems to signal concerns about future demand.
Saudi officials also have recognized that the U.S. and other oil-producing countries such as Brazil have expanded capacity at a faster clip than many analysts expected.
The U.S. is producing record amounts of oil, with production hitting 13.2 million barrels a day. Brazil is also expanding production quickly, and drilling is increasing in Guyana and other countries, too.
With so much capacity entering the market, more production from Saudi Arabia probably would cause prices to crash.
A possible crash is why Saudi Arabia has curtailed its production as part of a plan by OPEC+, which includes Russia and other non-OPEC allies, to keep prices high and balance the market.
Saudi Arabia now produces 9 million barrels a day, roughly its production in 2020 during Covid restrictions.
Even so, oil prices have stayed in a narrow range and U.S. oil prices have even briefly fallen below $70 a barrel. Demand is barely keeping up with supply despite decent global economic growth.
Citi
analyst Alastair Syme called the Saudi decision a “huge strategic shift” and thinks it “can be interpreted to suggest” that OPEC+ recognizes it has a problem.
“Namely the size of the growing capacity overhang in global oil markets and the need for Saudi Arabia to continue to cede market share to accommodate growth of competitors (US shale, Guyana, Brazil),” Syme wrote.
Saudi Arabia’s production cuts should help keep oil prices above $70 per barrel, Syme projected.
“The market should probably assume that Saudi Arabia is willing to defend $70/barrel (‘the OPEC+ put’) at all costs, at least in the short-term,” Syme wrote.
The winners from this move are probably big U.S. producers such as
Exxon Mobil
and
Chevron,
as well as Brazil’s
Petrobras.
With Saudi Arabia curtailing its production and helping keep prices high, those companies now have more of a green light to increase theirs without worrying about crashing the market.
Write to Avi Salzman at [email protected]
Read the full article here