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Morgan Stanley: It is possible that Saudi nationals will cut oil production more than they promised

27.12.2016.

Saudi Arabia, possibly, will have to cut oil production more than promised by it to OPEC. According to forecasts of Morgan Stanley investment bank, Riyadh can reduce oil production down to 9.5 mln. barrels/day or even more instead of 10.06 mln. barrels stipulated in the agreement of the oil exporting countries. In opinion of analysts, such course of events is possible in case of the worst scenario in the oil market. Oil production in October (the level, from which oil production countries count oil production reduction) made 10.54 mln. in Saudi Arabia.

According to Bloomberg, with reference to the report by Morgan Stanley, in such a manner the country sacrifices the export that can fall below 7 mln. barrels/day. In October, supplies from Saudi Arabia to foreign markets made 7.6 mln. barrels/day.

Experts of the investment bank assume that it will be difficult for the cartel to keep the production level below 33 mln. barrels/day in the first half-year of 2017, that is why Riyadh will have to downsize production even more, but Lybia and Nigeria exempted from reduction will not be able to increase the export.

Let us remind that for the purpose of the energy resource market stabilization, oil production countries have agreed on oil production reduction by 1.8 mln. barrels/day. Moreover, 1.2 mln. of them will be accounted for OPEC countries, other almost 600 thousand - for oil production countries outside the cartel. Russia committed itself to "cut" oil production by 300 thousand barrels from October levels.

Also, Riyadh retained the dumping policy in the European market that it has practiced since end of 2015. According to prices set for January 2016, the state corporation Saudi Arabian Oil Co reduces the price of the energy feedstock for the USA and Asia, instead it increases the price of "black gold" for EC. Price increase will make 20 to 80 cents/barrel depending on the oil grade. Price cutting for Asian consumers will make 60 to 1.6 dollars/barrel.

We would like to note that reduction of oil prices in 2014-2015 affected the budget revenue of Riyadh. The country finished the year 2015 with the deficit breaking all records - $98 bln.

Assuming that it will be long before high oil prices return, and trying to play safe from such falls in future, Saudi Arabia drew a 15-year plan of economy transition to a new level for the purpose of its diversification.

According to the document, non-oily profit should reach $141 bln. by 2020, while they made $43.6 bln. in 2015.