Moneycontrol Pro Panorama | Oil squeeze

Oil prices experienced an upswing on Tuesday after the International Monetary Fund (IMF) revised its global growth forecast.

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In a surprising turn of events, Saudi Arabia has directed its state-controlled oil giant, Aramco, to halt its plans to increase crude production capacity from 12 million barrels per day to 13 million barrels per day. This directive, issued by the Saudi Ministry of Energy, aims to maintain the current Maximum Sustainable Capacity (MSC).

Following government instructions, Aramco, a publicly-listed company, had previously announced its intention to elevate production capacity to 13 million barrels per day by 2027.

Analysts interpret this move as a cautionary signal regarding future demand. The International Energy Agency's (IEA) December annual report projected a global oil demand increase of 2.3 million barrels per day in 2023, reaching 101.7 million barrels per day. Oil prices experienced an upswing on Tuesday after the International Monetary Fund (IMF) revised its global growth forecast.

Saudi Arabia's decision is unexpected, particularly given assertions by various agencies that fossil fuel growth is in its concluding phase. Amidst the prevailing decarbonisation trend and global agreements to reduce carbon footprints, the move by Saudi Arabia seems counterintuitive.

This decision is also surprising against the backdrop of heightened tensions in the Middle East impacting oil supplies, and the developments in the Americas where the United States is once again issuing threats of sanctions against oil-rich Venezuela.

As the dominant force in the OPEC oil cartel, Saudi Arabia stands out as one of the few nations globally capable of increasing output, possessing a spare capacity of three million barrels per day. Saudi Arabia's decision suggests a strategic delay since other nations are maximising their oil production. It may be anticipating a reduction in production from other nations or engaging in a pricing strategy, expecting oil prices to rise as they constrain output.

Irrespective of the motive, Saudi Arabia's actions are inflationary, likely to keep energy prices elevated. Unless alternative energy sources significantly impact fossil fuel consumption, Saudi Arabia appears poised to capitalise on every unit of oil it produces.

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Shishir AsthanaMoneycontrol Pro