Oil prices have been in the news again, but perhaps not for the best reasons. Saudi Arabia is the largest crude oil exporter in the world and will increase production by December. It has abandoned its $100 per barrel price goal.
This decision may reshape global oil markets in the months to come as producers and consumers adjust their expectations of lower prices.
The move is made at a time when the dynamics of oil supply are changing, demand growth is weak, and there are economic challenges in countries that import large amounts of oil, such as China and the United States.
A new era for Saudi Arabia’s policy?
Saudi Arabia’s surprise decision to abandon the informal $100 per barrel target price came as a shock.
Saudi Arabia, along with other OPEC+ countries, has cut production since 2022 to stabilize the price due to economic uncertainty.
The effort to control the supply and support the prices reached its peak in 2022, when Brent crude averaged $9 per barrel. This was due to market volatility brought on by Russia’s invasion in Ukraine.
Recent developments, however, indicate that Saudi Arabia has shifted its focus away from high prices and towards regaining market shares.
A report by the Financial Times states that Saudi officials plan to increase production beginning in December despite fears of a prolonged period with lower prices.
The decision is made at a moment when the oil market in the world is experiencing a weak growth of demand and a rising supply from non OPEC countries such as the US.
The news had a rapid impact on crude prices. Brent crude futures fell 2.57% on Thursday to $71.57 a barrel and US West Texas Intermediate crude dropped 2.63% to $66.76.
The declines come after a short period of gains in the first part of the week. This optimism was fueled by China’s stimulus package.
Balance between national priorities and market share
Saudi Arabia’s decision to increase output was partly motivated by a concern about losing market share, especially to U.S. shale oil producers.
While OPEC+’s cuts were successful in temporarily boosting the prices, they created room for non-OPEC producers who could increase their share of global market.
Saudi Arabia, which has lost ground due to its oil cuts, is now trying to recover some of that ground.
This strategy is different from Saudi Arabia’s recent focus on maximising revenues.
The budget of the Kingdom, which is heavily dependent on oil revenue, was balanced at an estimated price of $100 per barrel.
The International Monetary Fund has stated that Saudi Arabia requires oil prices to be near this level in order to finance its ambitious spending plans. This includes a number of megaprojects as part of Crown Prince Mohammed bin Salman’s Vision 2030 initiative, which is a broad economic restructuring initiative designed to diversify Saudi Arabia’s economy.
Saudi officials are confident, despite the importance of oil revenue, that the kingdom can survive a period when prices fall.
Saudi Arabia also has other funding options such as foreign currency reserves and issuing sovereign debt.
The financial cushion provides the Kingdom with some flexibility, as it moves its focus away from price control and towards protecting its share on the global oil markets.
What pricing mechanisms should you be aware of?
Saudi Arabia has increased its production at a moment when global demand and supply are fluctuating.
China, the world’s largest oil consumer, has struggled to reach its growth targets. Its government has recently pledged more fiscal stimulus in order to achieve a growth rate of 5%.
Market analysts are still concerned by the slow growth in demand from China. This continues to put pressure on oil prices globally.
Other developments also affect the supply. Libya, which has experienced disruptions in its oil production because of political instability, could resolve internal issues regarding the control over oil revenues soon.
In a recent United Nations announcement, it was revealed that representatives of Libya’s east as well as west had agreed to appoint a central bank Governor. This could help restore stability for the country’s oil sales.
Return of Libyan oil would add to the already oversupplied market and further reduce upward pressure on price.
Russia, a major oil producer, and a key member of OPEC+, has stated that it does NOT plan to flood the markets with additional oil. Russian officials acknowledge that production costs have risen as oil extraction becomes more difficult.
Pavel Sorokin, Russia’s deputy energy minister, recently said that the country aims to produce 540 million tons of oil per year by 2030. However adjustments may be made based on market conditions.
Natural events, such as hurricanes, also play a part in this mix.
Hurricane Helene recently struck Florida and prompted a precautionary shut down of oil production in Gulf of Mexico.
Production of around 500,000 barrels a day (bpd), or about 30% of the output in this region, was temporarily stopped.
These losses will be temporary, as the storm is expected to miss the major oil and natural gas fields of the Gulf.
Should we expect lower price and greater volatility in the future?
Although consumers may welcome the prospect that fuel will be cheaper, the implications for energy producers and markets around the world should not undervalued.
Saudi Arabia will have to balance its desire to gain market share against the need to maintain its economic stability and finance its long-term goals.
The Kingdom’s capacity to navigate in a low-priced environment will be determined by its financial reserves, and the success of Vision 2030.
Prices could remain low for the near future due to the combination of increased Saudi Arabian supply, weak growth in demand in key markets, and the return in supply from countries such as Libya.
Geopolitical events and natural disasters as well as unexpected changes in global demand can still cause volatility.
Market participants should be on the lookout for signs of compliance in OPEC+ as some members are exceeding their production quotas.
Saudi Arabia’s decision could serve as an alert to other countries that they should follow suit or risk further destabilizing supply and demand.
The oil market is always unpredictable. Nothing is ever set in stone.
This post Saudi Arabia’s oil prices continue to drop: It has shifted away from its $100 price target in order to regain market dominance first appeared on The ICD
