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Russia’s Energy Minister Alexander Novak (L) and his counterparts from Saudi Arabia Prince Abdulaziz … [+]
AFP via Getty Images
After several years of relative stability in global crude oil markets, speculation is rising that strategic shifts from Saudi Arabia, OPEC, and the larger OPEC+ oil cartel could presage another period of higher market volatility in the months to come. If it happens, the good times enjoyed by US shale producers since the COVID pandemic could come to a quick end.
OPEC and OPEC+ – a combination of OPEC members, Russia, and other non-OPEC producing countries – have defended crude prices with relative success in recent years. But the ability of these cartels to support a target price floor has diminished during 2024 as rising volumes of crude have entered the market from places like the United States, offshore West Africa, and Guyana.
Saudi Arabia, a cornerstone OPEC member and the cartel’s biggest producer, has signaled a notable shift in strategy in recent weeks. The Kingdom has traditionally maintained an unofficial target price of $100 per barrel, aiming to balance high revenue with market stability. However, faced with market dynamics including lower demand forecasts and pressure from other OPEC members, Saudi Arabia has now indicated a readiness to abandon this price target. This strategic pivot became evident recently as Saudi Arabia prepared to increase oil output, aligning with broader OPEC+ decisions to gradually unwind some production cuts starting in December 2024.
In an email, Josephine Mills, analyst at Enverus Intelligence Research EIR), said EIR views “a potential rollback of production cuts as a recalibration of Saudi Arabia’s desired leverage in the market. Doing so today provides allowance for potential cuts in the future. It is not lower prices for longer. Instead, it’s lower prices to become stronger in terms of OPEC leverage.”
It must be pointed out that the last time Saudi Arabia sent this ‘preservation of market share’ signal was in 2014 when they and OPEC flooded the market with millions of barrels of additional crude. That move was in response to the then-nascent boom in US shale oil production coming mainly from the Permian Basin, the Bakken Shale, and the Eagle Ford Shale. Saudi and other OPEC officials at the time saw this US shale oil cutting into their market share and decided to mount a defense.
The result was a dramatically oversupplied market, a supply surplus that some believed reached as high as 8 million barrels of oil per day, and a collapse in crude prices. Over the next two years, more than 200 US shale producers were forced into bankruptcy, creating the worst depression in the domestic oil and gas industry since the mid-1980s. By the end of 2016, Saudi Arabia was coordinating with Russia and other big oil producing countries to form the OPEC+ cartel to raise prices to more economic levels.
This current shift in Saudi sentiment likely reflects a more complex set of factors. First, it probably reflects Saudi Arabia’s acknowledgment of the changing global energy landscape, where the demand for oil might not rebound as robustly as once expected, due to shifts towards renewable energy and changes in consumption patterns in China and other major consumers. This move also indicates a tactical retreat from sustaining artificially high prices through production cuts, a hallmark of OPEC and OPEC+ strategy in past years.
Economically, for Saudi Arabia, this could mean immediate revenue implications. The $100 per barrel target was not just about profit but was crucial for funding ambitious domestic projects like NEOM and Vision 2030, which aim to diversify the Saudi economy away from oil dependency. Globally, it could also lead to higher market volatility as the anticipation of increased supply, even if modest, has already shown its impact with oil prices dropping significantly in response to the news.
Mills says EIR anticipates this current strategy shift will create a more modest impact on global markets than seen in 2014. “EIR assumes in our base case view that OPEC rolls back the cuts by largely following their phase out plan. Due to the current overproduction this only adds ~ 1 MMbbl/d by exit-2025,” she said. “If no compensation for the overproduction is completed and cuts are rolled back, our Brent price forecast would be pushed down to $75/bbl for 2025. However, our current assumption is that OPEC will defend prices.”
The Bottom Line
For US shale producers, the implications are clear: After several years of living in a sweet spot created by focus on cost containment, scaling back drilling programs, and returning capital to investors, the prospect of another potential bust cycle now looms on the horizon. If the Saudi/OPEC/OPEC+ strategy shift is not carefully managed, this era of good feelings in the domestic oil business could come to a fast and painful end.
The post Saudi Strategic Shift Raises Specter Of Another Oil Bust appeared first on Energy News Beat.
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