Saudi Arabia is prepared to move away from its informal price target of $100 per barrel for crude oil as the country gears up to increase production. This shift indicates that the kingdom is accepting a period of lower oil prices, as reported by those familiar with the situation.
The world’s leading oil exporter, along with seven other members of the Opec+ group, had planned to end long-standing production cuts starting in October. However, a recent two-month postponement led to speculation about whether the group could ever ramp up output. This uncertainty caused the price of Brent crude, the international benchmark, to briefly fall below $70 this month, marking its lowest point since December 2021.
Despite this, Saudi officials are committed to restoring production as scheduled on December 1, even if it means enduring a prolonged phase of reduced prices, according to informed sources.
The anticipation of Riyadh relinquishing its unofficial price target impacted oil prices and shares of oil companies on Thursday. Brent crude declined by 3.5% to $70.87, while West Texas Intermediate, the US benchmark, fell by 3.8% to $67.06. The drop also affected the share prices of major European oil producers, with BP falling 4.1%, Shell down 5%, and TotalEnergies decreasing by 3.3%.
Saudi Arabia’s energy ministry did not provide a comment on the matter.
This new approach represents a significant shift for Saudi Arabia, which has historically led Opec+ members in reducing output to maintain high prices since November 2022. Brent crude’s price averaged $99 a barrel in 2022, its highest in eight years, due to market disruptions following Russia’s invasion of Ukraine. However, prices have since decreased.
Increased output from non-Opec countries, particularly the US, and weak demand growth in China have diminished the impact of Opec+ production cuts. As of September, Brent has averaged $73 a barrel, even amid escalating regional tensions from the conflict between Israel and Hamas in Gaza.
Saudi Arabia requires an oil price close to $100 a barrel to balance its budget, as estimated by the IMF, to fund several megaprojects central to Crown Prince Mohammed bin Salman’s ambitious economic reform plans. Nevertheless, the kingdom has decided it can no longer afford to lose market share to other producers. Officials believe they have sufficient alternative funding sources, such as foreign exchange reserves or issuing sovereign debt, to sustain through a period of lower prices.
A decade ago, Saudi Arabia ended the era of $100 per barrel oil by increasing output as prices fell in 2014, aiming to counter the rapid growth of the US shale industry. More recently, under Energy Minister Prince Abdulaziz bin Salman, the kingdom has focused on maximizing revenues through production cuts to support prices. However, this policy has occasionally strained relations with the US, which unsuccessfully sought increased production from Riyadh in 2022 following Russia’s invasion of Ukraine.
Saudi Arabia has been the primary contributor to Opec+ production cuts, reducing its output by 2 million barrels per day in the past two years—over one-third of the cuts by member countries. Currently, Saudi Arabia produces 8.9 million barrels per day, the lowest level since 2011, apart from the periods during the coronavirus pandemic and the 2019 attack on the state oil company’s facility at Abqaiq.
As per the delayed plan to unwind cuts, Saudi Arabia will incrementally increase its production by 83,000 barrels per day each month starting in December, ultimately raising its output by 1 million barrels per day by December 2025.
A significant concern for Saudi Arabia has been the partial non-compliance of several cartel members, including Iraq and Kazakhstan, who have been producing above their quotas. Opec Secretary-General Haitham Al Ghais visited these countries in August to secure commitments for adjustments in their future production plans to compensate for previous excess supply. Nonetheless, Saudi Arabia remains wary of compliance issues and may decide to accelerate the reversal of its cuts if these countries do not adhere to their agreements, according to one source.
