- Saudi Arabia’s recent warning that OPEC+ could cut production led to a rally in oil prices.
- Analysts say Saudi Arabia’s game is simple: keep oil prices high so the kingdom can capture as much revenue as it can.
- “More market uncertainty has pushed prices higher, which is exactly what Saudi Arabia wants to do,” said Morningstar’s Stephen Ellis.
Saudi Arabia’s recent warning that OPEC+ could cut production led to a rebound in oil prices that analysts said was intended to threaten the kingdom’s revenues.
Prince Abdulaziz bin Salman said on Monday that OPEC+ could cut oil production as “a false sense of security” in global markets has left them disconnected from fundamentals. Within days, several other OPEC members voiced support for his comments. Reports also emerged that OPEC+ would back a production cut if Iranian oil returned to the market under a revived nuclear deal.
In response, Brent crude, the international oil benchmark, rallied to return above $100 a barrel after falling for weeks amid recession fears and signs of progress on the Iran nuclear deal .
Rather than trying to restore the smooth functioning of oil markets, analysts say Saudi Arabia’s game is simple: keep oil prices high so the kingdom can extract as much revenue as it can.
“More market uncertainty has pushed prices up, which is exactly what Saudi Arabia wants to do,” said Stephen Ellis, utilities and energy analyst at Morningstar. “Saudi Arabia seems more concerned about a recession, which would cap oil prices, so it wants to take advantage of high oil prices as long as possible.”
Meanwhile, higher prices could be threatened if the US and Iran revive a deal that freezes Tehran’s nuclear program while allowing its oil to be sold again. Prospects for a deal rose after Tehran dropped a key provision that had long stalled talks.
Experts have estimated that Iran could add 1 million barrels of oil a day to world markets, significantly reducing the tightness of supplies as Europe tries to impose a partial ban on Russian crude in December.
As a result, the timing of the Saudi production cut comment is key, coming days after Brent crude neared $90 a barrel.
In fact, the kingdom’s breakeven price is roughly $85, according to Viktor Katona, chief crude analyst at Kpler, saying Riyadh “just needs money” and wants to avoid a price environment that is “not as convenient as before. ”
Efforts to keep oil prices high would conflict with U.S. attempts to cut crude as President Joe Biden looks for ways to tackle inflation.
So, as Washington and Tehran move closer to a deal that would lower oil prices, Saudi Arabia is moving the geopolitical needle by using OPEC+ production cuts as a threat against reentry They will go to market, Katona said.
“Saudi Arabia can make the deal worse for those involved,” he warned.