Saudi Arabia's Oil Market Power Play: A Look at OPEC+'s New Strategy

In a surprising move, Saudi Arabia has pushed the OPEC+ alliance towards a rapid increase in oil production. While seemingly a short-term grab for lost market share, this move harbors far greater ambitions: solidifying the Kingdom's position as a dominant player in the global energy market for the long haul.

At a historic meeting, eight major oil-producing nations, led by Saudi Arabia, Russia, and the United Arab Emirates, agreed to jointly increase production by 548,000 barrels per day starting in August. This decision represents an acceleration of the easing of production restrictions in place since April, which amounted to 2.17 million barrels per day. In addition, the UAE secured an additional quota of 300,000 barrels per day.

However, analysts believe that these ambitious increases will not drastically alter OPEC+'s total output. In fact, many member states have already reached or even exceeded their allowed quotas. Kazakhstan stands out in this regard, having consistently exceeded its allocated share, much to Saudi Arabia's dismay for several months. Estimates suggest that Kazakhstan's production in June reached 1.88 million barrels per day, a record figure close to March levels and well above its August target of 1.53 million barrels per day.

Overall, the eight nations collectively produced 32 million barrels per day in June, exceeding their combined quota of 31.38 million barrels per day. Therefore, lifting restrictions seems to be an attempt to "reconcile actual production with official figures."

Why Now?

The question arises: why did Saudi Arabia, the driving force behind OPEC+ and the world's largest oil exporter, choose this particular moment to increase production? There appear to be several overlapping factors:

• Re-establishing Discipline: Saudi Arabia aims to re-establish discipline within OPEC+, ensuring that all members adhere to their assigned quotas.
• Increasing Market Share: Saudi Arabia seeks to increase its share of the global market, compensating for the decline it has experienced in recent years.

The Advantage of Spare Production Capacity

Saudi Arabia possesses a significant competitive advantage: its spare production capacity. While many other producers face difficulties in increasing their output, Saudi Arabia has substantial untapped reserves. Estimates suggest that Saudi Arabia can increase its production by 3 million barrels per day within just 90 days.

In other words, with the exception of the UAE, Saudi Arabia is the only OPEC+ member capable of significantly increasing its production in the coming months.

A Price War on the Horizon?

Undoubtedly, increasing OPEC+ production will put further pressure on global oil prices. Indeed, we have witnessed a notable decline in Brent crude prices this year, with prices falling by 15% to below $70 per barrel. However, this price decrease may be beneficial to Saudi Arabia in the long term.

In the face of lower prices, oil-producing countries, both inside and outside OPEC+, tend to reduce their investments in new projects. Here, Saudi Arabia's advantage comes to the fore, as it enjoys low production costs and spare production capacity, putting it in a better position to meet increasing demand in the future.

The effects of lower oil prices have already begun to impact shale oil producers in the United States. Forecasts indicate that US oil production will begin to decline gradually, after years of continuous growth.

A Long-Term Bet

Ultimately, Saudi Arabia's strategy represents a long-term bet. While shale oil producers in the United States may be able to respond quickly to market movements, the larger impact on the oil industry as a whole takes longer to manifest. Investments in new projects, such as offshore oil fields, require years to translate into actual production.

Forecasts indicate that global oil supply will exceed demand in 2025 and 2026, thanks to increased production from non-OPEC+ countries. However, these forecasts are what drive Saudi Arabia to act now, to maintain its dominant position in the market in the long term.

In the current environment, where oil prices are highly volatile and there is uncertainty about the future of global energy demand, many oil-producing countries are hesitant to invest in new projects. This makes Saudi Arabia's long-term bet look all the more attractive.