For more than five years now, Saudi Arabia — the world’s largest oil exporter and the Organisation of the Petroleum Exporting Countries Plus (Opec+) kingpin — has been striving to balance the global oil demand and supply by controlling output. Riyadh has been at the forefront of this effort and has been shouldering the major weight of the Opec+ output cut mechanism.
In recent months, Opec+ cut its crude oil output by over five million barrels, some five per cent of the global supply. Saudi Arabia was contributing two-fifths of this output cut.
The effort, aimed at propping up the global oil market prices, was essential to meet the ever-growing budgetary requirements of major oil producers, Saudi Arabia included. Most Opec economies are often termed as single-product economies, with oil earnings staying crucial to meeting the needs of these petro-states.
But Riyadh now seems fed up with its act of propping up the oil markets by playing the role of a swing producer. Reuters reported last week that Saudi officials have been briefing allies and industry experts in recent days that they were unwilling to prop up oil markets with further supply cuts.
Inventories may increase by about 200m barrels over the next three quarters, which could drive crude toward the low $50s
There seems to be some logic behind the Saudi desperation. Despite the Opec+ output cuts, markets have not been able to stabilise much. Crude has shed about 19pc this year, briefly touching a four-year low last month, as the Trump administration’s tariffs fanned concerns that energy demand will fall.
However, to some extent, oil busters within Opec+ had to be blamed for this market weakness. Some Opec+ members have been overshooting their allocated output quotas — apparently at Riyadh’s cost.
Saudi Arabia is not ready to tolerate it any further. “Opec’s decision framework appears to be fueled by persistent cheating, particularly from the likes of Iraq, Kazakhstan, and Russia, among others,” TD Cowen strategists, including Dan Ghali and Bart Melek, said in a note to clients.
Inventories may increase by about 200m barrels over the next three quarters, which could drive crude toward the low $50s, Bloomberg quoted them as saying in the note. Riyadh is also not ready to concede its market share any further.
This carries ramifications for the health of the oil markets and the oil revenues of the major producers over the coming months. Many years back, while Ali Al-Naimi was at the helm of the Saudi Petroleum Ministry and fed up with quota cheating by other Opec oil producers, Riyadh had to adopt the same path to protect its market share.
The growing shale output from the US was also an apparent target of the Saudi policymakers then. Mr Naimi had told American drillers in February 2016 that they could “lower costs, borrow cash or liquidate” in the face of sub-$50-a-barrel prices.
The result was disastrous in some sense. Market prices collapsed. This ultimately resulted in a ceasefire among the producers.
Today can’t be any different. Saudis are not ready to continue sharing the burden of the oil output cut, almost single-handedly, any further. With several fellow Opec+ members failing to adhere to their output targets and to compensate for oversupply in recent months, a frustrated Riyadh is changing tack, Opec+ sources told Reuters.
This possible shift in Saudi policy could suggest a move toward producing more and expanding its market share, a major change after five years spent balancing the market through deep output as a leader of the Opec+ group of oil producers.
Despite its dependence on cash flow from oil sales, Saudi officials have been emphasising in recent weeks that the kingdom can live with the fall in prices by raising borrowing and cutting costs, media reports said, quoting several sources. “The Saudis are ready for lower prices and may need to pull back on some major projects,” one of the sources said.
Saudi Arabia needs oil prices above $90 to balance its budget, higher than other large Opec producers, such as the United Arab Emirates, according to the International Monetary Fund (IMF).
Theories on the reasons behind the apparent change in Saudi strategy range from punishing Opec+ members for exceeding their quotas to a move to fight for market share after ceding ground to non-Opec producers such as the United States and Guyana.
Higher output may also be a fillip to US President Donald Trump, who has called for Opec to boost output to help keep US gasoline prices down. Some feel that Riyadh needs to oblige President Trump for political reasons. That may also have pushed Riyadh to change its track on crude output.
All these have an impact on the economies of the major oil producers. The IMF has downgraded its economic growth forecast for the oil exporters in the Middle East to 2.3pc from 4pc projected last October due to the slide in oil prices.
“Across the region, rising trade tensions and policy uncertainty are adding to the impact of conflicts and extended oil production cuts to weaken growth prospects,” the IMF said in its Regional Economic Outlook for the Middle East and Central Asia.
In the meantime, the IMF has also downgraded Saudi Arabia’s GDP growth forecast to 3.0pc this year, lower than a previous forecast of 3.3pc economic growth, following the 13pc decline in oil prices over the past month.
In a welcome change, the projected lower oil prices could take some pressure off the balance of payments of oil consumers, like Pakistan.
Published in Dawn, The Business and Finance Weekly, May 5th, 2025
