Saudi Arabia is preparing to abandon its informal target of $100/bbl for crude oil as it plans to increase production, signaling the kingdom’s acceptance of a period of lower prices and intentions to take back market share, according to sources cited by the Financial Times.
The country, along with other OPEC+ members, had been set to lift long-standing production cuts at the start of October. However, a 2-month delay raised doubts about whether the group could raise output, with Brent crude briefly falling below $70/bbl this month, its lowest since December 2021.
Despite this, officials from Saudi Arabia are committed to restoring production on Dec. 1, even if it results in extended low prices. This marks a significant shift in Saudi Arabia's approach, as the country had previously led OPEC+ in cutting output since November 2022 to maintain high prices.
In 2022, Brent crude averaged $99/bbl, the highest in 8 years due to market disruptions following Russia’s invasion of Ukraine. However, prices have since fallen, averaging $73/bbl in September. Factors like increased non-OPEC+ production, especially from the US, and a slowing economy and weak oil demand growth in China, have reduced the effectiveness of the cuts.
Meantime, the market share of OPEC+ has slipped to all-time lows due to its production cuts and increased supply from the US and other oil-producing countries, according to the International Energy Agency (IEA).
While Saudi Arabia needs oil prices near $100/bbl to balance its budget, the kingdom has decided against sacrificing market share and believes it can rely on alternative funding sources like foreign reserves or sovereign debt during a period of lower prices, according to sources cited by the Financial Times.
“It is this news that sent prices lower this morning (Sept. 26, 2024) before the rebound started. The headline sounded dramatic indeed, yet all that happened was that the Saudis confirmed the planned unwinding of 2.2 million b/d of voluntary cuts between December 2024 and November 2025," said Tamas Varga, analyst at PVM Oil Associates Ltd.
"If it does go ahead, it will add 180,000 b/d of extra supply per month. No doubt, it will loosen the global oil balance but at the same time it will reduce OPEC’s spare production capacity. It will most probably lead to stock builds in 2025 and keep prices under moderate pressure," he continued.
"What is perhaps more important is whether it is the harbinger of a supply war within and outside the organization. If the answer is yes, a painful plunge to the $40/bbl area cannot be ruled out. For now, however, it is nothing more than implementing a pre-agreed strategy that should prevent oil prices rallying significantly above $80/bbl,” Varga concluded.
