Oil output cut could contract Saudi economy by 0.5%
ALBAWABA – The Saudi economy is likely to shrink by 0.5 percent in 2023 in light of the oil production cut the Kingdom of Saudi Arabia announced on Sunday, according to Capital Economics.
The Kingdom's energy ministry said on Sunday, after the OPEC+ oil policy meeting, that Saudi will cut its oil output to 9 million barrels per day (bpd) in July, from around 10 million bpd in May.
This is the biggest reduction in years as the country and other producers seek to bolster oil prices.
Previously, Capital Economics forecast Saudi gross domestic product (GDP) growth at 1 percent this year, 2023.
However, the company still expects Saudi to run a budget surplus this year.
The Kingdom’s breakeven oil price is $80 a barrel, the company estimates, according to Reuters. Brent crude was trading at about $76.8 a barrel on Monday.
Nonetheless, the company expects Brent crude prices to rise to $90 on the barrel by the end of 2023, Reuters reported.
"We have left our end-year Brent crude price forecast unchanged at $90 per barrel for end 2023, just that prices may be a little more elevated in the interim than we had envisaged," James Swanston, emerging market economist at Capital Economics, said.
Besides the global financial crisis and COVID-19 pandemic, the GDP contraction "would be the weakest pace of growth in the last 20 years," Capital Economics said in its research note.
"We estimate that if the 1.0 million b/d oil production cut is only maintained for July, it will reduce Saudi Arabia’s real headline GDP growth by 0.3 percentage points,” Monica Malik, chief economist at Abu Dhabi Commercial Bank told Reuters.
“However, if it is extended for the remainder of the year (i.e. July to December), we estimate it will lower Saudi Arabia's headline GDP growth by 2.0 percentage points," she said.
Malik had previously forecast GDP growth of 1% for Saudi Arabia in 2023 and a fiscal breakeven price of $86.3 a barrel, according to Reuters.
