The unilateral production cuts could harm its finances and raise petroleum prices for motorists and OPEC adversaries.
The majority of OPEC+ energy ministers gathered in Vienna over the weekend and consented to maintain the previously agreed-upon reduction in oil production through the end of 2024. The United Arab Emirates received approval to increase hydrocarbon production. However, Saudi Arabia, the most influential member of OPEC, has announced it will unilaterally reduce production by 10%, or 1 million barrels per day, beginning in July.
OPEC and its Russia-led allies almost always reduce or increase output in tandem, using their official meetings to rubber-stamp production plans agreed to in advance, but last weekend saw “one of the most contentious production meetings in recent years,” according to The Wall Street Journal. Prince Abdulaziz bin Salman, Saudi Arabia’s Minister of Energy, desired across-the-board cuts to raise oil prices, but other members, particularly in Africa, resisted vehemently.
The unexpected decision by Saudi Arabia to shoulder the entire one million-barrel cut on its own did increase oil prices, and it could contribute to higher gas prices this summer. But because the Saudis will sell less oil, a modest price increase will result in less revenue for the kingdom. What motivates Saudi Arabia’s unilateral production cuts?
What do the commentators have to say?
When the Saudis engineered OPEC+ production cuts in October and again in April, it was widely viewed as a jab at President Biden, who had personally urged Saudi Crown Prince Mohammed bin Salman (MBS) to increase output in the face of persistently high inflation. However, it now appears they may only require the funds.
CNN’s Eoin McSweeney wrote that oil revenue accounts for two-thirds of Saudi Arabia’s income, and global prices are still short of what Riyadh needs to balance its budget, let alone pay for “the giga-projects that lie at the heart of its Vision 2030 program to transform the economy.” The crown prince is attempting to diversify the Saudi economy, but “foreign investment is nowhere near where Riyadh wants it to be,” and there is an urgent need for funds as the construction phase of MBS’s ambitious Vision 2030 projects approaches.
The Journal reported that Prince Abdulaziz, MBS’s half-brother, has recently been “fixated” on punishing “Wall Street short sellers” whose “oil market bets can cause prices to fall.” Some analysts attribute Abdulaziz’s unilateral output cut in part to his “annoyance” over a perceived “mismatch between the underlying fundamentals of the market — which OPEC can influence — and trader sentiment, which is a more difficult beast to tame,” Financial Times writer David Sheppard wrote. According to brokerage Jefferies, the decision to maintain July’s cut open for extension was “likely put in place to discourage future short positioning.”
What follows?
Abandoning OPEC’s “all for one, one for all” playbook is a potentially “high-reward but extremely high-risk strategy” for the Saudis, and “for now, it doesn’t look like the strategy is paying off,” Javier Blas argued in Bloomberg Opinion. This could change if Abdulaziz’s unilateral cut jolts a market that is “about to tighten anyway due to seasonally rising oil demand” and prices soar “back to the $90 to $100 range the Saudis prefer.” The “far less rosy view,” however, is that “the OPEC weekend did not go Saudi Arabia’s way” and that Prince Abdulaziz was “effectively forced into a solo cut” to assist other members at the expense of Riyadh.
In the 1980s, Saudi Arabia “desperately tried to limit its own supply to maintain market equilibrium,” as David Fickling wrote for Bloomberg Opinion and Abdulaziz is well aware. It was beneficial for curbing climate change but disastrous for the Saudis. In the 1980s, Riyadh’s “Samson-like attempts to carry the entire global oil market on its shoulders ended in a shocking reversal” as the Saudis slashed prices and pumped freely to an oil-hungry world.
The world is not as parched as it once was, according to Fickling, and “should the current run of restraint by Saudi Arabia end with another reversal,” this “accelerating energy transition will pose an alarming question to the kingdom.” Perhaps when the Saudis open the faucets this time, the world will no longer desire what they are selling?”
