Saudi Arabia Adjusts Oil Strategy Amid Market Shifts
Saudi Arabia is poised to increase oil production, moving away from its previous aim of maintaining a $100 per barrel price. This shift indicates acceptance of potentially lower oil prices, according to sources familiar with the situation.
The kingdom, alongside other OPEC+ members, had initially delayed plans to ease production cuts, leading to concerns about their ability to boost output. However, Saudi officials are now committed to resuming production increases from December 1, regardless of potential price impacts.
News of this strategy change affected oil prices and company shares. Brent crude dropped by 3.5% to $70.87, while West Texas Intermediate fell by 3.8% to $67.06. Major European oil companies like BP, Shell, and TotalEnergies saw their shares decline significantly.
This marks a notable policy shift for Saudi Arabia, which had previously led production cuts to sustain higher prices. In 2022, the average price for Brent crude was $99 a barrel, driven by market disruptions from geopolitical tensions, but prices have since decreased.
Non-OPEC producers, especially the US, and reduced demand from China have lessened the effects of OPEC+’s cuts. Despite the ongoing conflict in Gaza, Brent crude averaged $73 a barrel recently.
Saudi Arabia requires high oil prices to balance its budget, supporting ambitious economic reforms. However, it is now prioritizing market share over price maintenance, considering alternative funding sources like foreign reserves or sovereign debt.
A decade ago, Saudi Arabia ended the $100 oil era by increasing output to challenge US shale growth. Recently, under Prince Abdulaziz bin Salman, the focus has been on maximizing revenue through production cuts, although this has sometimes strained US relations.
Saudi Arabia has significantly reduced its production to support OPEC+ cuts, currently producing 8.9 million barrels per day, the lowest since 2011, excluding pandemic impacts. Plans to unwind these cuts will see monthly production increases of 83,000 barrels per day, aiming for a total boost of 1 million barrels by December 2025.
Compliance issues with other OPEC members, such as Iraq and Kazakhstan, who have exceeded quotas, remain a concern for Saudi Arabia. The kingdom may adjust its production strategy if these countries fail to adhere to agreed commitments.