Saudi Arabia u-turned on its unlimited oil policy and prices are jumping

Saudi Arabia, the world’s biggest oil producer, is beginning to reverse a two-year policy of unlimited oil production, agreeing an output cap with fellow members of oil cartel OPEC.

The price of crude oil jumped more than 6% after the Organisation of the Petroleum Exporting Countries agreed to limit production after a meeting in Algeria.

The countries agreed to limit production to a range of 32.5-33.0 million barrels per day, the first cut in production since the 2008 financial crisis, according to the Financial Times.

Here’s what happened when the cut was announced:

Saudi Arabia initially began its policy of pumping out as much oil as possible with the aim of stunting the growth of US shale oil producers, who were threatening to supplant Saudi Arabia as the US’s main source of oil. A feud with Iran and Russia, two other major suppliers, prolonged the policy.

However, Saudi Arabia’s unravelling public finances are a more pressing problem now. Saudi Arabia has struggled to diversify its economy away from oil and prices hit lows of below $30 a barrel earlier this year on the back of slowing global growth and increased supply.

In April, Deputy Crown Prince Mohammed bin Salman unveiled the Vision 2030 plan to end what he called Saudi Arabia’s “addiction” to oil, but a bunch of ugly warning signs have appeared in Saudi Arabia’s economy.

The Saudi economy grew at just a 1.5% in the first quarter, its slowest rate since 2013. The non-oil private sector was up 0.2% year-over-year — its smallest increase in about 25 years. Things have gotten so bad that Saudi Arabia is tapping the international bond market for the first time.

Here’s the chart:

While the production cut hasn’t sent oil back to pre-2014 prices, it showed that Saudi Arabia is feeling the adverse effects of cheap oil keenly.

As Bloomberg’s Javier Blas put it, in the standoff between the Kingdom and the rest of the world’s oil producers, Saudi Arabia blinked first.

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