The situation in the oil market may change dramatically in the near future. And all because Saudi Arabia is ready to abandon its unofficial target value of “black gold” in the amount of 100 dollars per barrel. This was reported by the Financial Times on Thursday, September 26, citing its sources in Riyadh. The reason is the readiness of the Middle Eastern country to increase production.
Recall that the world's largest oil exporter, along with seven OPEC+ members, initially planned to change tactics from October after years of production cuts. The fact that these plans are not changing was confirmed to journalists today, in particular, by Russian Deputy Prime Minister Alexander Novak.
However, dragging out the implementation of this decision for two months now raises doubts that the group will actually increase production, especially after the price of Brent crude briefly fell below $70 earlier this month, reaching its lowest level since December 2021.
In addition, we should not forget that historically Saudi Arabia has led OPEC+ production cuts to keep prices high. Taking the brunt of the cuts, Saudi Arabia has cut its production by 2 million barrels per day over the past two years, accounting for more than a third of the total cuts by member countries. The kingdom is currently producing 8.9 million bpd, the lowest since 2011, excluding the impact of the pandemic and the 2019 attack on the Abqaiq refinery complex.
As a result, Saudi Arabia's contribution to the common cause was strong, with the average price of Brent crude reaching $99 per barrel in 2022, the highest in eight years. Since then, however, there has been a major shift in the market. The impact of OPEC+ cuts on the market has weakened as supply from producers outside the alliance, especially from the US, has been increasing. Sluggish demand growth in China is also not playing into the hands of exporters. Brent crude is now trading at an average of $73 per barrel. This is despite ongoing geopolitical tensions such as the conflict between Israel and Hamas in Gaza.
And while the IMF says Saudi Arabia needs an oil price close to $100 a barrel to maintain financial equilibrium, the kingdom has apparently decided not to cede market share to competing producers. In the future, Saudi Arabia intends to gradually increase monthly production by 83,000 bpd starting in December and eventually increase production by 1 million bpd by December 2025.
Recall that the era of oil prices at $100 a barrel was also ended by Saudi Arabia. It happened ten years ago. The Gulf state increased production in 2014 amid falling prices to compensate for the rapid growth of the US shale industry. As a result, oil prices collapsed 70% in two years. It was the third-largest decline since World War II and marked a new oil crisis. Since then, “black gold” has recovered some of its losses, but has not returned to its previous highs.
But even this was not enough for Saudi Arabia. In early 2020, the country announced a new “sale” - minus 6-8 dollars for each barrel for consumers in Europe, Asia and the United States. The market began a free fall of prices - on the day of the announcement of discounts, Brent crude oil lost 30% of its value. An unprecedented drop since the Gulf War.
And it was not the first act of free will of Riyadh, which so seriously affected the oil market. Suffice it to recall 1985. Then the Saudis' refusal to support oil prices provoked their fall by 61% and the subsequent crisis.
Whether to expect a crisis this time or to the article FT should be treated with a healthy dose of skepticism, given that the kingdom itself has not given any official comments, answers Nikolai Dudchenko, an analyst at FG “Finam”.
“Here, as in the case of Bloomberg and Reuters, the basis of information for the FT are some internal sources, which means that this kind of statements should be taken with a certain skepticism, at least until official confirmation. If the purpose of such an article was to lower the price, then we can state that, yes, it was achieved,” the analyst said.
In the moment, the price of Brent crude oil is down almost 3% - to 71.55 dollars per “barrel”. However, as Dudchenko points out, not only the article in the British newspaper is to blame.
“Another possible reason for the turnaround in the oil market was the prospect of “détente” in the conflict in the Middle East. Although, judging by the actions of the parties, we can't tell about it yet. For example, Hezbollah fired rockets at Tel Aviv for the first time. In response, Israel promised to increase the intensity of combat sorties, and Israeli generals meanwhile confirmed preparations for a ground operation in Lebanon. At the same time, the Israeli channel Channel 13 reported that a ceasefire agreement could be reached within a few hours. The same information is confirmed by the Lebanese channel LBCI, which reports that negotiations between the parties are being mediated by Amos Hochstein. Prior to this, the US, France and other countries called for a 21-day ceasefire. It is important to remember that the U.S. is categorically disadvantageous to destabilization in the region right now, so every effort will be made to stop the escalation. We think that the current White House administration is more or less able to cope with this task,” the expert added.
And at the same time, it is not yet clear how the situation on the oil market will develop further, especially after the November elections in the United States.
“The probability of Donald Trump's victory is quite high, and with this, the degree of uncertainty in the Middle East conflict increases. Oil traders, in all likelihood, preferred to temporarily reduce the geopolitical premium,” Dudchenko concluded.
