Saudi Arabia's announcement that it would abandon its oil capacity expansion plans was likely driven by a more resilient oil supply outlook than a change in its demand view, Barclays said in a note on Wednesday.

The Saudi government on Tuesday ordered state oil company Aramco to halt its oil expansion plan and to target a maximum sustained production capacity of 12 million barrels per day (bpd), 1 million bpd below a target announced in 2020.

The decision should ease market participants' concerns about the country's urgency to phase out its unilateral output adjustments, Barclays said, noting that heightened volatility could follow if demand continues to surpass expectations or the Middle East conflict spreads.

The kingdom is the world's largest oil exporter and is pumping around 9 million bpd, well below its capacity after it cut production under an agreement with OPEC and its allies.

"If the demand outlook were deteriorating, as one of the lowest cost producers, Saudi Arabia would arguably be better off increasing its output to slow the pace of transition and investments in international capacity."

(Reporting by Swati Verma in Bengaluru; editing by Jason Neely)