Saudi Arabia’s decision to raise the price of its flagship crude oil to Asia marks a significant move in the global energy markets. This increase, albeit less than expected, reflects the kingdom’s confidence in demand recovery.
Saudi Arabia’s state owned; Saudi Aramco has officially raised the September selling price of Arab Light Crude for the customers in by 20 cents to $2 barrel above the regional Oman Dubai benchmark. This increase, albeit less than expected, reflects the kingdom’s confidence in demand recovery. Despite a dip in profits in its the second quarter of 2024 by 3.4%, the State-owned company continues to reassert its regional dominance and its commitment to maintain its dividend payments to the shareholders.
Is Saudi Arabia experiencing demand Shortages In global market
Saudi Arabia is one of the leading oil export countries in the world, with the power to change the tide of the market. However, many speculate that the country is experiencing demand Shortages from Asian giants like China and India who are seeking alternative suppliers such as the United States, Brazil and Russia. Reduced demand coupled with the need to switch to greener energy, has led to Saudi Arabia increasing the cost only by 20 cents against what was expected to be 50 cents by Bloomberg.
The LSEG Oil Research data indicates a decline in Saudi Arabia’s market share in Asia, showing a reduction from 4.99 million BPD in June to 4.64 million in July. China’s shift is particularly worrying as the discounted oil from Russia has replaced Saudi Arabia in China.The competitive pricing of Russian crude and the diversification of oil sources by Asian countries are significant factors contributing to the dip in Saudi Arabia’s market share.
Production Cut and OPEC+
In early June, OPEC+ voluntarily announced the extension of production cuts into 2025 in an effort to avoid supply shock and to increase the price for oil. Saudi Arabia has also agreed to voluntarily scale back its production to 9 million BPD in 2024.
Saudi Arabia is actively working to stabilise the global oil market and support its economic reforms by leading the OPEC+ alliance in cutting oil production. By reducing its output by an additional one million barrels per day and extending these cuts into mid-2024, Saudi Arabia aims to keep oil prices steady and counteract global economic uncertainties. The inclusion of Brazil in OPEC+ and with Russia also reducing its exports and production, is going to further rein in the global supply of oil.
Saudi Arabia’s economy has faced contraction in GDP growth for four consecutive quarters, partly due to the oil production cuts. The kingdom’s oil production averaged around 9 million barrels per day, below its capacity of 12 million bpd. These cuts, which began in October 2022, are part of OPEC+ efforts to boost oil prices amid fluctuating demand. Despite the recent downturn in Brent Crude prices, Aramco remains optimistic about future oil demand, particularly from China, and anticipates global demand to exceed 104 million bpd for the year.The president of the company, Amin Nasser reaffirmed the confidence of shareholders that the long term oil demand is increasing as they anticipate strong demand from China in the third quarter.
By reducing production and lessening the price hike for September, Saudi Arabia is hoping to recover the loss from the previous quarter and to secure more long term supply deals with leading Asian economies like South Korea, China, Japan and India.
Saudi Aramco and Dividends
Saudi Aramco is the cash cow of the Saudi Arabia economy, with the government owing 81.5% of shares of the company. The company’s initial public offering in 2019 was a historic event, raising $29.4 billion, and a secondary offering this year brought in $12.35 billion by selling nearly 1.7 billion shares.Aramco has recently introduced a performance-based dividend alongside its base dividend.
Despite these strong payouts, Aramco has faced challenges. After record profits in 2022, driven by soaring oil prices post-Ukraine invasion, profits fell by 25% last year due to lower oil prices and production cuts. The first quarter of this year saw a 14.5% drop in profits. For the second quarter the company reported a net profit of $29.1 billion reflecting a decline of 3% from last year due to lower crude production and weaning refinery margins.
The company’s net income for the first half of the year was $56.3 billion, down from $62 billion in the same period last year. Despite this, Aramco reaffirmed its substantial second-quarter base dividend of $20.3 billion and declared an additional performance-linked dividend of $10.8 billion for the third quarter. The company expects to distribute $124.2 billion in dividends for 2024.
Thus, while the company and country is facing a slowdown in demand of oil from the world, it still holds reigns over the global oil price and continues to maintain market stability amidst market volatility.
