BY RON BOUSSO
LONDON—Saudi Arabia has signalled that it is willing to enter a painful price war to assert its dominance over other oil producers, but worsening global economic conditions mean the kingdom’s standard playbook might be less effective this time around.
Saudi Energy Minister Prince Abdulaziz bin Salman in recent weeks has appeared to threaten an all-out price war to restrain recalcitrant OPEC+ members that have failed to comply with the alliance’s production quotas.
The strategy appeared to shift into a higher gear over the weekend. On Saturday, six key members of the Organization of the Petroleum Exporting Countries plus Russia and Kazakhstan agreed to rapidly unwind production cuts for a second consecutive month.
The decision to add 411,000 barrels per day of oil in June means that between April and the end of next month, OPEC+ will have added 960,000 bpd into the market, which is already well supplied.
OPEC+ sources have told Reuters that the group could further accelerate the production hikes and bring back to the market as much as 2.2 million barrels per day by November.
The OPEC+ moves shocked the market, pulling benchmark Brent crude prices below $60 a barrel on Monday, a threshold beneath which many producers will struggle to make money.
Even more ominous, oil future prices from October onwards are now in a contango structure, whereby crude prices for future delivery are trading at higher prices than contracts for closer delivery, indicating market expectations for long-term oversupply.
This will likely make oil producers think twice before investing in new production, and could lead many short-cycle US shale producers to cut activity.
On its face, this looks like a familiar pattern. In 2014, Saudi Arabia launched a market share war to strangle soaring US shale production. In 2020, it clashed with Russia at the peak of the coronavirus pandemic.
And today the kingdom is allowing more supply to flood markets at a time when it is upset with Kazakhstan, Iraq and possibly the United Arab Emirates for repeatedly exceeding production quotas under an OPEC+ supply agreement.
Does that mean the outcome will be the same today? Not necessarily.
The 2014-16 price war largely achieved Riyadh’s goals, reducing global supplies and increasing Saudi Arabia’s control of the market, as did the 2020 spat, which resulted in Saudi Arabia and Russia both curbing production and agreeing to coordinate activity going forward.
