Oil: Riyadh On The Rack?
Summary: it looks increasingly as if OPEC+ will agree to resume unwinding the voluntary cuts in output with effect from April, despite seemingly compelling reasons to sit tight for now.
We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast here.
Barring a completely unexpected development, when the OPEC+ eight (Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia and the UAE) next meet on 1 March it is very likely that:
- despite this week’s sell-off, the price of Brent crude will be above US$65 per barrel (pb) — indeed, there is a decent chance that it will be very close to the US$71.62 mark where it stood on 3 March 2025 when Saudi Arabia first announced the unwinding of the cartel’s voluntary cuts in output; and
- critically from the perspective of what is widely acknowledged as Riyadh’s principal reason for boosting output, the US benchmark West Texas Intermediate (WTI) will be topping the US$62pb mark below which US shale producers claim that they really start to feel the squeeze.
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As Saudi Crown Prince Mohammed bin Salman’s flagship project NEOM is being significantly downscaled, construction equipment used on the project is being put up for auctionIn the circumstances, media reports that the eight are considering recommencing the unwinding of their voluntary cuts in April should come as no surprise. However, taking this decision is not, by any means, straightforward. Consider the following six factors which they must surely take into account in their deliberations.
First and foremost, for a majority of the eight, increasing their output is simply not an option as they are already either at full stretch or (in the case of Kazakhstan and Russia) unable, for one reason or another, to get any additional output onto the global market. Indeed, in all probability only Saudi Arabia itself and the UAE (despite persistent reports that it is already producing well over its quota) are in a position significantly to increase their output.
Second, Saudi Arabia has to weigh increasing production to push down the price with the aim of clawing back lost market share at the expense of US shale producers against its immediate fiscal imperatives. As Andrew England and Chris Campbell wrote in the Financial Times on 25 January, having already had to surrender the 2029 Asian Winter Games, the Saudis are expected to announce shortly a major downsizing of Crown Prince Mohammed bin Salman’s flagship Neom project “as Riyadh seeks to manage its finances as it grapples with tightening liquidity after a decade of massive spending and with oil prices subdued.”
Third, still more difficult for the Saudis to swallow may be the fact that the UAE economy faces no such fiscal stresses as a result of the lower oil price. Indeed, by so visibly having to trim its own economic diversification plans to accommodate reduced revenues, Riyadh may well be playing into Abu Dhabi’s hands. As Jonathan Panikoff reflected in a 6 February essay in Foreign Affairs on the rising tensions between the two:
Riyadh and Abu Dhabi are locked in a broader strategic contest, jockeying over economic, political, and security matters. What was once a friendly competition has devolved into rivalry. The root of their crisis lies in Vision 2030, Saudi Arabia’s grand plan for its future. If the kingdom is to reach the goals set by its de facto leader, Mohammed bin Salman…, it must challenge the UAE’s dominance in finance, tourism, and commerce.
Fourth, even if the current unwinding freeze is extended (i.e. consistent with what I wrote as recently as 10 February!) the world will still be awash with oil. Despite cutting its forecast for growth in demand (ironically, as a result of the higher price) in its latest monthly report, the International Energy Agency is still anticipating a surplus through the year equivalent to roughly four percent of total global consumption. Furthermore, although it remains relatively optimistic over growth in demand for the year as a whole, even the OPEC secretariat believes that demand for the cartel’s oil is set to fall in 2026Q2 by 400,000 barrels per day (bpd).
Fifth, there is no telling how — and how quickly — the current tensions between Iran and the US are going to unfold. On the one hand, Washington is continuing to build up its forces in the Gulf region and (although, personally, I doubt this to be the case — primarily for US domestic political reasons) some commentators believe that it is preparing for a protracted military campaign. On the other, talks are continuing and, although Tehran seems content to drag them out, Donald Trump’s love of a quick and headline-grabbing deal even at the expense of real substance is not to be underestimated. The former would certainly see a sharp (if, in my view, largely unwarranted) spike in the oil price. The latter would — just as certainly — trigger an equally sharp sell-off.
Last but by no means least, the US shale sector is (again) proving to be far more resilient than many — including, it seems, the shale producers themselves — had expected. As I argued in the 22 December Newsletter, there is no guarantee that total output would fall significantly even if WTI were to settle below the US$55pb mark for a lengthy period — and especially if the current spell of higher prices has allowed the sector to replenish its cash cushion.
I posed the question as long ago as 16 September as to whether Riyadh was fighting another losing battle. Even almost a year on from the start of unwinding, I think it is too soon for us to be sure of the answer especially when, as I argued on 10 February, the fundamentals remain consistent with a sub-US$60pb price tag on Brent crude. For this reason above all, I continue to believe that the Saudis would do well to sit tight for now in the hope that a geopolitical premium of between US$7pb and US$12pb will fall away quickly, offering a moment when doubling down big time on unwinding would surely make sense. However, I suspect that the current price of crude may well make the temptation to ‘tweak’ output upwards a little in April all too irresistible.
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