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Aramco’s Q1 2024 Results: Saudi Arabia is at a Dangerous Tipping Point

The only real power that Saudi Arabia has in the world comes from its oil sector. The greater its production appears to be, the more it is taken seriously by countries that otherwise would have nothing to do with it. Given this, it has been clear for many years that a closer look at the Kingdom's crude oil production capabilities and its reserves figures plainly show that they are much lower than Saudi Arabia has said they are, as analysed in full in my new book on the new global oil market order. The release last week of Saudi Aramco's Q1 2024 results underlines the point again, with an obvious dichotomy between a notable increase in capital expenditure over the quarter on the one hand, and the January directive from the Energy Ministry to the company to cancel a planned 1 million barrels per day (bpd) expansion in oil production capacity. So the question is: if the money is there for other capital expenditure, why is it not there for an expansion in production capacity? Is it because Saudi Arabia knows it cannot increase its crude oil production capacity any further? Or is it because the Kingdom simply cannot afford to increase production capacity and spending on other things? In fact, it is both these things, as delineated below.

According to Saudi Arabia, it has a maximum sustainable capacity (MSC) for crude oil production right now of 12 million barrels per day (bpd). However, the fact is that Saudi Arabia produced an average of 8.267 million barrels per day (bpd) of crude oil from 1973 to 1 May 2024, according to figures from OPEC itself. In its entire history, it has only managed to produce 12 million bpd on one occasion - in April 2020 - after which it immediately went back down to 8.49 million bpd. This month marked the beginning of the very short Third Oil Price War, as also analysed in full in my new book on the new global oil market order, in which Saudi Arabia sought once again to delay progress in the U.S. shale oil sector which is a direct threat to its economic well-being into the future. However, even this very temporary spike to 12 million bpd was not what it seemed, according to a very senior source in the European Union's (E.U.) energy security complex spoken to exclusively by at the time. "The Saudis use deliberately obfuscatory language about their oil sector, talking of 'capacity' and of 'supply to the market' rather than of 'output' or 'production' - and these are not the same things at all," he said. Indeed they are not. The true meaning of 'production' and 'output' in the international oil market is crude oil that is drilled from wellheads in the ground. Crude oil 'spare capacity', according to the accepted definition in the markets from the Energy Information Administration is, "the volume of production that can be brought on within 30 days and sustained for at least 90 days".

Related: Oil Prices Rise as Market Anticipates OPEC Monthly Report

Saudi Arabia's version of these terms is markedly different, and therefore wrong. The Kingdom uses the terms 'capacity' and 'supply to the market' to mean not just production from the wellheads of their own oilfields but also using crude oil supplies held in storage at any given time in the country. It also appears to mean to Saudi Arabia any oil supplies that can be withheld from rolling term-contracts and re-directed into those stored supplies. During the 2014-2016 Oil Price War, Saudi nearly drained its storage facilities of oil and cut back on oil supply contracts with non-priority clients. And it also seems to mean any oil supplies of similar crude grades to its own that Saudi Arabia can buy from other OPEC members - either directly or through brokers - that it can then pass off as its own supplies. According to the E.U. source, a source in the U.S. energy security complex, and three senior oil broking sources exclusively spoken to by over the past decade, Saudi Arabia bought in significant supplies of crude oil from Iraq and other countries not just over the 2014-2016 Oil Price War, but also after the September 2019 attacks by the Iran-backed Houthis on its Abqaiq and Khurais oil facilities, and during the brief 2020 Oil Price War as well. Ironically, given that Tehran was behind the 2019 attacks, some of the oil bought by Saudi Arabia through brokers believing it to be from Iraq, was actually 'rebranded' oil from Iran instead, according to a source who works very closely with Iraq's Oil Ministry.

So, the cancellation of the expansion in crude oil capacity in January 2024 appears to be reality catching up with fantasy. Saudi Arabia simply cannot increase this capacity from '12 million' to 13 million, because it does not have capacity of 12 million bpd - or anything like it - and never has had. Having said that, if it had the necessary money, it could increase the capacity it has, and then announce it has increased it to 13 million or 14 million or whatever figure it wants to pluck from the air, as these numbers appear to go unchallenged by most. So why did it not do that? With 'Occam's razor' being by far the best method for dealing with anything to do with Saudi Arabia's oil sector, the simplest answer is most likely the best, and it works here too: it is because it does not have the money to do so, as building and maintaining such capacity is very expensive. Far from being awash in oil money as many people think, Saudi Arabia has still not fully recovered financially from the appalling effects it brought upon itself from its 2014-2016 Oil Price War, as detailed in full in my new book on the new global oil market order. Additionally, up until the 2022 invasion of Ukraine by Russia, Saudi Arabia's fiscal breakeven price for oil was higher than the market was paying, which meant in simple terms that it was not making enough to cover its expenses as a country. It is no better again now, with its 2024 fiscal breakeven price at US$96.17 pb of the benchmark Brent oil price. In fact, Saudi Arabia has forecast a budget deficit this year of SAR79 billion (US$21.07 billion), which many oil market observers believe to be extremely optimistic.

Relentlessly piling on the financial misery for Saudi Arabia remains the huge burden of the massive dividends guaranteed by the Saudi government in order that it could finally sell at least 1.5 percent (against the originally planned 5 percent stake) in the initial public offering (IPO) of Saudi Aramco itself. So omni-toxic was this investment proposition to potential developed market participants that the government had to guarantee a US$75 billion dividend payment in 2020, split equally into payments of US$18.75 billion every quarter. Staggeringly, this rose in 2023 to US$97.8 billion for the year, bewilderingly boosted by additional 'performance-linked' dividends. These are designed to target 50-70 percent of annual free cash flow, net of the base dividend, and other amounts including external investments, according to Aramco's chief executive officer, Amin Nasser. In Q1 2024, the base dividend was US$20.3 billion, which will be increased by another performance-linked dividend distribution of US$10.8 billion, bringing the total to US$31 billion. For 2024 as whole, Saudi Aramco expects to pay US$124.3 billion in dividends!

By Simon Watkins for

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More