Latest News

Bousso: Saudi Arabia plays short-term and long-term with OPEC+ Production Gamble

OPEC+ will increase its output target by 2,5 million bpd from April to September

Saudi Arabia has large spare production, while other countries are producing at capacity

Riyadh’s share of the global oil production fell to 11% by 2024, from 13%

Ron Bousso

LONDON, 7th July - Saudi Arabia’s desire to increase OPEC+ output rapidly may place Riyadh at the forefront of regaining market share while also consolidating its dominance on the long-term.

Eight major oil producers, including Saudi Arabia, Russia and the United Arab Emirates as well as Kuwait, Oman, Iraq and Kazakhstan, decided on Saturday to boost their joint production in August by 548,000 barrels a day. This will accelerate the unwinding from a series of cuts that totaled 2,17 million bpd, which began in April.

By the end of September, OPEC+'s output will have likely increased by 2.5 million bpd. This is due to the combination of the accelerated schedule with the UAE's agreed increase of 300,000.

The new quotas won't actually result in a drastic change to the aggregate output of the group, since most members already produce at or above these levels.

Saudi Arabia has been irritated by Kazakhstan's failure to meet OPEC+ targets for several months. Central Asia produced 1,88 million barrels per day (bpd) in June, which was the same as its all-time record in March, and far exceeded its production target for August of 1,53 million bpd.

According to estimates, the eight OPEC+ countries produced a total of 32 million bpd compared to a quota set at 31.38 millions bpd. Unwinding production cuts means catching up to the reality of the situation on the ground.

Saudi Arabia is the de-facto leader in OPEC+, and also the top oil exporter in the world. By making this move, it will be able to reestablish the discipline within the group, and increase its share of the market.

SECURE CAPACITY

According to the Energy Institute’s Statistical Review of World Energy, Saudi Arabia's share of the global oil production is expected to decline from 13% in the last three decades to just 11% by 2024.

According to Kpler, crude oil exports from the country will account for only 15% in 2024 of the global seaborne exports, down from 18% on average in the last decade.

According to the International Monetary Fund, oil and gas revenues will contribute 22.3% to the country's GDP in 2024.

Saudi Arabia is fortunate to have a large amount of oil production capacity that has not been tapped.

Keshav Lohiya of Oilytics, the founder of a consultancy, said that data from Petro-Logistics showed that the country produced 9.55 million barrels per day in June. The OPEC+ agreement allows for an additional 200,000 bpd in production through August.

According to estimates by the International Energy Agency, it also has a buffer of production that is nearly 3 million BPD. It can tap this within 90 days.

Saudi Arabia, and only the UAE, is the only OPEC+ member that has the potential to increase its production substantially in the next quarter.

Price War

The addition of additional production will put downward pressure on crude oil prices. They have already fallen 15% to less than $70 a barrel this year, largely because OPEC unwinded its initial supply cuts and due to concerns about demand resulting from President Donald Trump’s trade war.

Saudi Arabia could benefit from falling prices because both OPEC+ members and non-OPEC+ members are likely to cut back on spending when prices fall. This means that Riyadh, with its abundant spare capacity and low costs of production, will be in a better position than its competitors to meet the new demand.

Recent price drops have already made a significant impact on U.S. producers of shale oils. Energy Information Administration predicts that U.S. oil production will decline from a record high of 13.5 millions bpd during the second quarter this year, to 13.3 million in the fourth quarter 2026. This is the first decrease since the production surge at the end last decade.

Riyadh may decide to accelerate OPEC+ in the months ahead to increase its own production and put more pressure on its competitors.

LONG GAME

Saudi Arabia is ultimately a long-term gamble.

The impact of Riyadh’s move on the rest industry may not be felt for some time.

It will take many years for the slowdown in investment to be translated into lower production.

According to IEA estimates, the global supply is expected to increase by 1.6 millions bpd, to an average 104.6 million bpd, and 970,000 bpd more next year. This will outpace the anticipated growth in demand during this period. According to the IEA, the majority of supply growth will be driven by non OPEC+ producers, such as the United States and other countries like Brazil, Argentina, Guyana, Canada, and Guyana.

These forecasts were the exact reason why Saudi Arabia needed to act to maintain its market dominance on the long-term.

Riyadh's gamble could pay off, given the current market dynamics. Oil producers are reluctant to invest heavily in new production because of low prices and the uncertainty surrounding global demand for energy.

You like this column? Open Interest (ROI) is your essential source for global commentary on financial markets. ROI provides data-driven, thought-provoking analysis. The markets are changing faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, X.

(source: Reuters)