Saudi Aramco shares fell sharply this afternoon, Wednesday, affected by a drop in oil prices 1% after Saudi Arabia announced plans to boost crude production capacity for the first time in more than ten years, while Russia questioned Saudi Arabia's decision to increase oil production capacity.

This comes at a time when sources told Reuters that Saudi Arabia asked government departments to submit proposals to reduce their budgets by at least 20% to counter the decline in crude prices.

At twelve o'clock UTC, Aramco’s shares were traded at 29.70 Saudi riyals ($ 7.91), down 4.7% from its previous close, and well below the initial public offering price of 32 riyals, according to which the company’s value was estimated at about $ 1.7 trillion when it was included in December.

Saudi Arabia said on Wednesday that it plans to increase oil production capacity for the first time in more than ten years, a day after it announced a record increase in crude supplies in a battle over market shares plunged to world prices last week.

The CEO of Saudi Aramco, Amin Al-Nasser, said in a statement today, Wednesday, that the company received a mandate from the Ministry of Energy to increase its oil production capacity to 13 million barrels per day from 12 million barrels per day at present.

Today's announcement may be seen as yet another step to fueling the price war with Moscow after the collapse of the OPEC-Russia agreement last week. Oil prices fell in morning trading more than 1%.

By 07:40 UTC, Brent crude was down $ 0.41, or 1.1%, to settle at $ 36.81 a barrel, while US West Texas Intermediate was down $ 0.42 or 1.2% to $ 33.94.

Russian skepticism
Meanwhile, Russia has questioned Saudi Arabia's decision to increase oil production capacity, and Russian Energy Minister Alexander Novak said on Wednesday that Saudi Arabia's plans to increase oil production capacity are "probably not the best option", with differences over the policy of crude production between the two major suppliers intensifying.

He added that Saudi Arabia "takes the initiative to promote its products" in the global markets, and that his country is conducting numerous phone calls with OPEC and non-members.

Moscow said that Russian oil companies may increase production by up to 300 thousand barrels per day, and possibly by up to 500 thousand barrels per day, which plunged the Russian ruble and shares.

Talks broke out last week between members of OPEC Plus, an informal alliance of OPEC countries, Russia and other producers, which has been supporting prices since 2016.

Russia has rejected OPEC's call to deepen existing supply cuts, to respond to the organization to remove production restrictions.

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Emirati support
The UAE entered the line, stressing that it is ready to increase its oil supplies by about one million barrels per day next month.

The government "ADNOC" group said in a statement that it "has the potential to supply the markets with more than four million barrels per day in next April", that is, more than one million barrels of the current daily production rate.

austerity
Informed sources told Reuters that Saudi Arabia asked government departments to submit proposals to reduce their budgets by at least 20%, in new austerity steps to meet the sharp decline in oil prices.

The same sources added that the request was sent more than a week ago due to concerns about the impact of the Corona virus on crude markets and before the collapse of the production cut agreement between OPEC and its allies on Friday.

One source said that when sending budget requests, Saudi officials were expecting tough negotiations with Russia regarding the need to deepen production cuts in order to stabilize markets.

Moscow rejected the proposal, to ignite a price war in the oil market between the two countries and plunge in crude prices.

The Saudi Ministry of Finance has sent directives to government departments to submit proposals to cut between 20% and 30% in their budgets for 2020, according to Reuters.

One source said that the Ministry of Foreign Affairs has already implemented a 20% reduction, adding that the cuts will not affect wages but rather projects that can be deferred and contracts that have not yet been awarded.

Saudi Arabia, the world's largest oil exporter, relies heavily on crude revenues. The International Monetary Fund said that Riyadh needs an eighty dollar price per barrel to set the 2020 budget, which has an estimated deficit of 187 billion riyals (50 billion dollars).

Economists expect that the Saudi budget deficit will rise from 4.7% of GDP in 2019 to a percentage in the double digits, while the government expected a deficit of 6.4% in December.

Analysts say Saudi Arabia can afford lower oil prices if the standoff with Russia continues thanks to its huge foreign reserves, but it may need to increase borrowing along with cuts in spending.

Riyadh stepped up confrontation with Moscow on Tuesday by announcing an increase in crude supplies to record highs in April, in what appeared to be a rejection of Moscow's initiatives for new talks.

Saudi Arabia has recorded a budget deficit since oil prices tumbled in 2014, when the kingdom abandoned its price support strategy to seize market shares.