Saudi Arabia wrangled OPEC ministers into a tougher-than-expected oil production deal — a maneuver critical for its own long-term plans.
Wednesday's deal comes as Saudi Arabia is trying to remake its oil-dependent economy into one that is more diversified, under a plan it callsVision 2030. A higher oil price would help boost revenues at a time when it has been running deficits and borrowing.
"They need a decent oil price, and they need to maintain market share. Part of the great irony of Vision 2030 is that in order to diversify the Saudi economy away from oil, they need to sell oil," said IHS Markit Vice Chairman Daniel Yergin.
The kingdom steered OPEC on Wednesday to cut back on the oil spigot in order to boost prices. All producers have been struggling with a bruising cycle that has strained budgets and hampered their ability to reinvest in energy infrastructure. The Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels a day, bringing output to 32.5 million barrels a day.
Additionally, OPEC said non-OPEC producers are also expected to contribute with a 600,000-barrels-per-day reduction, including a surprise 300,000 barrels a day cut by Russia. Saudi Arabia would trim just 486,000 barrels a day, about 300,000 less than expected.
"The Saudis really pulled off a victory for themselves ... I think that the most recent sell-off in crude oil scared them all into this. I think they saw what lay ahead if they didn't do this," said John Kilduff, founder of investment firm Again Capital.