Scanning the latest intelligence on oil markets, Saudi Arabian officials came to an upsetting conclusion this month: the kingdom's oil policy wasn't working.
Saudi energy minister Khalid al-Falih's attention was drawn to an Organization of the Petroleum Exporting Countries' prediction that a global glut of oil would persist well into 2017, said people familiar with the matter. The data suggested that economic pain from low oil prices would last longer than the ministry first believed, as the Saudis fought an expensive war in Yemen and middle-class living standards eroded.
"The pressure was mounting," said a person close to the Saudi oil ministry. "Falih and the government realized they need to show they are not just watching their economy and others suffer."
Mr. Falih didn't respond to requests for comment.
Mr. Falih's move to reverse Saudi oil policy evolved quickly over the past several weeks, from the day he received the production figures until Wednesday, when he agreed in principle to production cuts along with fellow members of OPEC, the 14-nation cartel that controls over a third of world oil production, according to people familiar with the matter.
By Wednesday night, Mr. Falih was ready to make a compromise Saudi Arabia had refused for months: Iran, the kingdom's rival, would be essentially exempt from production limits. "Everyone sees the need for rebalancing sooner rather than later," Mr. Falih said before OPEC agreed to collectively reduce output by between 1% and 2%.
It remains to be seen if the Saudis will follow through, but the roughly 5% oil-price increase after OPEC's decision was announced would mean hundreds of millions of dollars in extra revenue for the kingdom, if the gains hold as long as a month.
This week, Saudi Arabia cut the salaries of its top officials by 20% and scaled back perks for government employees.
The kingdom's middle-class—accustomed to subsidized electricity and water—is getting those perks cut. Saudi Arabia plans to reduce spending on public wages to 40% of the budget by 2020, from 45%.
Mohammad Abdulrahman, a 34-year-old Saudi who works in Riyadh as an information technology consultant, said he and his wife had given up eating out and traveling.
"I just hope those tough measures by the government ease in the near future or oil prices rise," Mr. Abdulrahman said. "Otherwise I have to find a second job to make ends meet."
At the same time, Saudi Arabia is pressing ahead with an air campaign in Yemen against Houthi rebels loyal to the country's ousted president. The war is one reason Saudi Arabia's foreign reserves are down to $ 555 billion from $ 737 billion before prices started falling in 2014.
That economic pain began to undercut Saudi Arabia's oil policy, people familiar with the kingdom's strategy said.
Saudi Arabia had long reasoned that vast new American oil supplies and potential carbon regulations would keep oil prices well below $ 100 a barrel for a long time. Production cuts would only help competitors win customers.
Saudi Arabian production hit record highs this summer of almost 10.7 million barrels a day.
The flood of oil sank prices to less than $ 28 a barrel this winter before recovering to $ 40 to $ 50 a barrel—still well below what Saudi Arabia needs to fund government spending.
Still, Ali al-Naimi, the country's former oil minister, said the country could survive at $ 20 a barrel in February. When OPEC and Russia tried to secure a deal to hold production steady in April in Qatar, Saudi Arabia walked away and blamed Iran for ramping up production.
The equation changed in early September. OPEC concluded that the low prices weren't flushing less-competitive non-OPEC production out of the market as fast as originally thought.
Mr. Falih and other Saudi officials, people familiar with the matter said, appeared worried about how prices below $ 50 a barrel in 2017 would affect the valuation of Saudi Arabian Oil Co., known as Saudi Aramco, the state-run oil firm that the kingdom plans to publicly list in 2018. The Aramco IPO is the centerpiece of a plan to transform the Saudi economy and diversify it away from oil dependence.
Saudi Arabia offered OPEC a secret deal this month, people familiar with the matter said. The kingdom would cut production by 400,000 barrels a day. Iran was expected to hold output steady at 3.6 million barrels a day, the people said. Iran's oil minister, Bijan Zanganeh, ultimately rejected it. Iran wanted to reach 4.2 million barrels a day.
Over this past weekend, Mr. Falih talked to OPEC Secretary General Mohammad Barkindo and backed his plan for a collective OPEC cut of almost 1 million barrels a day over a year, according to people familiar with the matter. Mr. Falih sweetened his offer to OPEC, saying Iran could increase output to 3.7 million barrels a day, the people said.
On Wednesday afternoon, the OPEC meeting was quickly consumed by the Iranian-Saudi rivalry. A few hours in, Mr. Falih made a compromise that his predecessor, Mr. Naimi, wasn't allowed to make in Qatar: Iran, Libya and Nigeria would be treated more leniently.
It isn't clear how much Iran will be allowed to pump, though its officials have said they want to raise production by about 10%, to about 4 million barrels a day.
Most details of the production cut have been put off until OPEC's next meeting on Nov. 30 in Vienna. Olivier Jakob, an oil analyst with Switzerland-based Petromatrix, said he saw a shift in Saudi policy.
"I'm not convinced they have changed from the market-share policy but I have to think they have erased the 'We don't care if it goes to 20 $ /bbl' policy," said Mr. Jakob. "They seem less idealistic, a little more realistic."
—Selina Williams contributed to this article.
Write to Summer Said at summer.said@wsj.com and Benoit Faucon at benoit.faucon@wsj.com
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