Saudi Arabia’s decision to halt Saudi Aramco’s maximum sustained capacity increase will reduce the global supply buffer available to absorb supply-side shocks or demand increases over the medium term, Fitch Ratings says.
It does not immediately affect the physical oil market.
Saudi Aramco is majority-owned by the government of Saudi Arabia, which controls 90.18% of its share capital directly, with a further 8% owned by the country’s sovereign wealth fund and its subsidiary, and the rest by outside investors. It had previously guided it would spend USD48 billion-52 billion in capex in 2023 and potentially more in 2024 and beyond, which included growth projects that would increase maximum sustained capacity to 13 million barrels per day (MMbpd) by 2027 from 12MMbpd currently.
Saudi Aramco stated this week that it will refresh its capex guidance in March 2024. We believe that the company can reduce planned capex. This would support dividend payments flowing mostly to the government, which may be re-invested in non-oil sectors.
The scale of these potential changes in Aramco’s capex and dividends will not materially affect the credit profiles and financial positions of Saudi Arabia or Saudi Aramco, and will have no rating implications.
The change in the oil investment strategy, however, sends a signal to the market that it should not overly rely on Saudi Arabia to absorb any future increases in consumption or supply disruptions. The decision could contribute to the tightening of the oil market if global oil consumption grows strongly by end-2030 and the energy transition proceeds slowly.
We expect the market to be well-supplied in 2024, assuming no major disruptions. Global demand growth will moderate to 1.2MMbpd in 2024 from 2.3MMpbd in 2023, according to IEA, and will be broadly met by supply increases from non-OPEC countries, including the US, Canada, Brazil and Guyana. We do not expect a strong upside to our USD80/bbl Brent price assumption for 2024 due to shipping re-routing from the Red Sea as there is material OPEC+ spare capacity of over 5MMbpd.
Saudi Arabia produces significantly below its maximum sustained capacity of 12MMbpd, with production averaging 9MMbpd in 2H23. Saudi Arabia is the main balancing supplier, accounting for most OPEC+ spare capacity, which is available to absorb potential supply shocks. However, this supply buffer could gradually diminish should global non-OPEC supply increase more slowly than demand in the next few years.
Saudi Arabia’s lower oil investments could have some negative impact on order book growth for its contractors, including KCA DEUTAG (B+/Positive), Borr Drilling (B/Stable) and Shelf Drilling (B/Stable). However, we expect that their rig utilisations in the region will remain high (eg KCA’s reported utilisation in Saudi Arabia was 100% in 3Q23). Nabors Industries (B-/Stable) has a JV with Saudi Aramco; however, our assessment of Nabor’s credit profile is mostly focused on its consolidated operations.
Source: Fitch Ratings