The possibility that Saudi Arabia will lift the “floodgates” on its oil production has increased in recent weeks, fueled by “deteriorating cohesion” among the group of major oil producers known as OPEC+, according to a Capital Economics report released Monday.
A “sense of frustration is clearly increasing,” Kieran Tompkins, climate and resources economist at Capital Economics, wrote in the note on Monday. “While the oil market focus has shifted to geopolitical risks and potential near-term supply disruptions, we believe that, just as importantly, the possibility that Saudi Arabia could open the floodgates has increased in recent weeks, in addition to reports about deteriorating cohesion among OPEC+ members. ”
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Producers in OPEC+ – made up of the Organization of the Petroleum Exporting Countries and its allies – who have implemented voluntary production cuts have overproduced by up to 800,000 barrels per day, he said.
Earlier this month, the Wall Street Journal reported that Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, warned fellow producers in a conference call that oil could fall to $50 a barrel if they don’t stick to agreed production cuts . However, OPEC said on X that the article incorrectly reported that a conference call had taken place. “The OPEC Secretariat categorically refutes the claims made in the story as completely inaccurate and misleading.”
Tompkins also pointed out that a September 26 article from the Financial Times suggested that Saudi Arabia could comfortably weather a period of lower oil prices through alternative financing measures. This “strikes a not-so-subtle reminder that it has the ability to ‘punish’ ‘cheating’ producers,” said Tompkins, who titled his note: “It’s when, not if, Saudi Arabia opens the oil taps. ”
In the past, marked shifts in Saudi Arabia’s oil policy, in the mid-1980s and mid-2010s, have led to declines in oil prices.
In a note last month, James Swanston of Capital Economics, a Middle East and North Africa economist, had also said the case for Saudi Arabia to boost oil production was growing stronger. A rebound, he said, would bring some economic pain and would require Crown Prince Mohammed bin Salman to change course in his approach to oil policy since coming to power, but it would “allow the Kingdom to gain market share recapture.”
For now, the current state of the oil market is unlikely to indicate that a major change in oil policy is imminent, Tompkins said. The current situation in Saudi Arabia is “not nearly as dire as in the past,” he said. For example, the Saudis had cut oil production by 75% in the run-up to their oil policy reversal in the mid-1980s, but since September 2022 they have cut production by almost 20% – suggesting the Kingdom is not doing so. It’s pretty much a position now.”
If Saudi Arabia were to increase production to its capacity of 12.5 million barrels per day, from about 9 million barrels per day, it would need a significant drop in oil prices below $50 per barrel before oil revenues exports “would be significantly worse than is currently the case”. ,” said Tompkins.
In Monday trading, the global Brent crude benchmark December contract BRN00 BRNZ24 traded at $77.60 per barrel on ICE Futures Europe, down $1.44, or 1.8%.
“All told, the risks to our view of Saudi Arabia turning on the taps and ramping up production at some point have increased, perhaps to about a 30% chance by the end of 2025,” Tompkins said.
The OPEC+ meeting, scheduled for December 1, will be crucial. In September, OPEC+ agreed to extend voluntary production cuts for two months until the end of November and then phase out cuts on a monthly basis in early December.
“One of the lessons from 2014 and 2020 was that the failure of the negotiations around these meetings led to Saudi Arabia changing course,” Tompkins said. “The December meeting could be a potential flashpoint.”
