Oil price fall pushes Saudi Arabia to look at raising output

Shutterstock

• ‘Major shift in thinking’ by Riyadh
• Shrinking market share
• $100 a barrel target given up

Saudi Arabia is preparing to raise its oil output from December, in an attempt to reclaim its shrinking global market share.

The world’s biggest crude exporter will have to accept lower crude prices for longer but is resigned to giving up its $100 a barrel target price, according to reports.

Oil prices dropped sharply on Thursday following claims in the Financial Times that eight Opec+ members are likely to unwind their production cuts in December after a two-month delay, if the effort to prevent prices from falling is unsuccessful.

Ole Hansen, head of commodities strategy at Saxo Bank, said the move represented “a major shift in thinking” by Riyadh. 

“The outlook for slowing demand growth, not least in China, has probably prompted them to accept a lower price tag for crude and, with that, the need to increase production,” he said.

Brent traded 2 percent down at $71.38 per barrel at Thursday lunchtime, while WTI slumped to $68.16 a barrel.

“We believe the 70s are the new 80s for Brent, though the risk of an increased supply-driven slump into the 60s cannot be ruled out, especially if Opec+ unity is challenged by persistent cheating from several members,” Hansen said.

• Saudi oil receipts drop to a three-year low

• Opec+ weighs which cards to play as options narrow

• ‘Bot traders’ defy Opec and determine the price of oil

Opec+ planned to bring online 180,000 barrels per day (bpd) in October and restore around 2.2 million bpd of voluntary cuts over the next 12 months.

The group has been holding back around 5.8 million bpd from the market, but at the cost of shrinking market share, which has dropped to around 40 percent of the global crude supply.

The share of the market held by Opec+ producers is expected to continue to fall because of growing non-Opec oil production, mainly from the US, Canada, Guyana and Brazil. 

Saudi Arabia bears the burden of most Opec+ cuts, reducing its output by 2 million bpd over the past two years. 

It pumped 9.8 million bpd during 2019, increased its output to 11.55 million bpd during the brief price war with Russia in April 2020, but reduced it to 8.89 million bpd in July this year, while its exports dropped to 5.7 million bpd, the lowest levels since August 2023.

The International Monetary Fund says that Saudi Arabia, the de facto leader of the Opec+ oil producers group, needs an oil price close to $100 a barrel to finance its ambitious Vision 2030 reform project. 

Giga-project funding cut

Lower oil prices have already caused Saudi Arabia to cut back on funding this year for its giga-projects and other plans, which have been valued at more than $1.25 trillion.

The Saudi government and bodies such as the Public Investment Fund have ramped up their bond offerings to make up some of the gap. Analysts say the Saudi government could also dip into the central bank’s foreign exchange reserves

Saudi GDP has also taken a hit due to the output cut policy. The economy contracted 0.8 percent in 2023. However, analysts are expecting GDP to move into positive territory by early next year. 

In December 2023 observers told AGBI that Saudi Arabia could shift to a policy of flooding the market, damaging the access of higher-cost producers, in a bid to dominate global share. 

These reports could be intended as a warning to Opec+ members such as Iraq and Kazakhstan who are seen as failing to comply with the cuts, producing more than their respective quotas.