Greg Priddy
Saudi Arabia’s strategic pivot is about letting go of the illusion of market control and moving production back up toward capacity, which will provide more revenue in the long-term.
At a brief online meeting on May 3, OPEC+ decided to again surprise the market with a bit more supply, raising its quotas for June by 411,000 bpd. This, once again, accelerated the pace of phasing out the years-long production cuts which have been in place in various forms since 2020.
This came despite the fact that Brent crude oil closed around $61 per barrel the previous day, and WTI was around $58.
Unlike the previous surprise a month earlier, which led to a sharp selloff, this one did not come as much of a shock to the market. It underscores the fact that after trying to restrict the oil supply for most of the period since 2016, except for a brief price war with Russia in 2020 during the COVID-19 pandemic, the Saudis are once again accepting that they will end up a “price taker” – and that this is the revenue-maximizing strategy over the long-term.
The rhetoric in recent months has downplayed the shift – since nobody wants to admit the failure of one of Crown Prince Mohammed bin Salman’s (MBS) signature initiatives: a more activist OPEC+. Instead, it has been dressed up as a cudgel against OPEC+’s cheaters, particularly Kazakhstan, which has produced more than 400,000 bpd over its quota, and Iraq. But the talk of forcing “compensation cuts” on them has ebbed in recent months.
What has changed is that producers, including Saudi Arabia, have let go of the notion that global demand growth will be strong enough to open up a gap for OPEC+ to expand into. Instead the “call on OPEC+” has stayed relatively flat in recent years, as non-OPEC+ supply has expanded fast enough to fulfill the relatively weak increases in demand.
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