Saudi Arabia's hydrocarbon sector will benefit from curtailed Western demand for Russian crude due to sanctions and price caps, and the lifting of COVID-19 restrictions in China, spurring demand for non-Russian energy products, according to S&P Global Ratings.
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"Since the war in Ukraine began in February 2022, demand for Saudi hydrocarbons and petrochemicals has strengthened, underpinned by a desire by Western alliance countries (led by the US, EU, UK, and Japan) to secure non-Russian supplies of oil and gas (which has largely supported global prices and non-Russian volume demand)," the agency said in a March 17 report e-mailed on March 19. "China's lifting of strict pandemic-related restrictions in January 2023 and the new real GDP growth target of 5% for 2023 announced by the Chinese government at its National People's Congress could also support global and Saudi hydrocarbon demand and may lead to the OPEC+ easing current production quotas."
OPEC+ countries are currently in the midst of trimming their production quotas by 2 million b/d through to the end of 2023.
OPEC+ meetings in December and February affirmed the production cut decision that went into force in November as several officials from the 23-member alliance sounded caution over optimism for higher Chinese oil demand.
Highest G20 economic growth
The 2 million b/d cut is happening against the backdrop of Russia's 500,000 b/d production cut in March, which comes in retaliation to Western sanctions and price caps on its energy sector.
On Dec. 5, G7 countries imposed a $60/b price cap on Russian crude alongside an EU ban on oil imports from Moscow. The G7 countries then went on to impose prices caps on Russian oil products on Feb. 5 as the EU slapped a ban on imports of crude derivatives from Moscow.
A key OPEC+ monitoring committee, co-chaired by Russia and Saudi Arabia, is due to meet on April 3 to discuss the October agreement.
Saudi Arabia, the world's biggest oil exporter, is also expected to raise its production gradually through 2026, up from an average of 10.6 million b/d in 2022, S&P Global Ratings said. Saudi Aramco is boosting its maximum sustainable capacity of oil to 13 million b/d by 2027 from 12 million b/d now.
Saudi Arabia pumped 10.46 million b/d in February, up from 10.42 million b/d in January, according to the latest Platts survey by S&P Global Commodity Insights. The country has an OPEC+ quota of 10.478 million b/d.
Soaring oil prices in 2022 helped the Saudi economy grow 8.7%, the highest among G20 countries, and "the economy will continue to benefit from Saudi Arabia's leading role as the largest individual oil exporter globally," the agency said.
Swift production adjustment
Saudi Arabia's spare oil production capacity provides it with "the ability to adjust production swiftly when market conditions change, in the current environment of reasonably strong global energy prices," the ratings agency said.
Oil prices, which hovered around $90/b in October, have since lost ground amid investor fears of a global economic recession.
Platts assessed Dated Brent at $72.28/b on March 17, down 1.17% on the day, according to S&P Global data. The marker has dropped by over 13% so far in March.
Prices plunged sharply last week to the lowest level since December 2021 on fears of contagion of a banking crisis that has roiled financial markets and sparked fears of a global economic recession.
The collapse of banks in the US and Europe is fanning those recession fears, following the bankruptcies of Silicon Valley Bank and Signature Bank in the US and the Swiss central bank's $53 billion credit to Credit Suisse, the country's second-biggest lender.
Saudi Arabia's energy sector may still be subject to attacks by Yemen's Iranian-backed Houthi militia, despite a China-brokered political agreement between Riyadh and Tehran, the ratings agency said.
Previous Houthi attacks on energy infrastructure in the Persian Gulf, Saudi Arabia and the UAE, OPEC's third biggest member, temporarily helped oil prices spike in the past.
The Houthi militants, who have been engaged in a war with Riyadh in Yemen since 2014, have previously claimed responsibility for several attacks on Saudi Arabia's energy infrastructure, including pipelines and refineries, as well as vessels in waterways such as the Red Sea.
The most high-profile incident in Saudi Arabia claimed by the Houthis was in 2019 when armed drones hit Aramco's giant Abqaiq oil processing facility, knocking off about 5% of the world's global oil supply and sending oil prices soaring.
"Saudi oil and other facilities have from time to time been attacked by missiles and drones, ostensibly from Iranian-supported Yemeni Houthi militia," the ratings agency said. "Such drone attacks have been ongoing in recent years and remain a concern in relation to the maintenance of oil production levels."