Why Saudi Arabia is ditching its triple-digit oil price dreams

The Financial Times reports that Saudi Arabia stands “ready to abandon its unofficial price target of $100 a barrel for crude as it prepares to increase output, in a sign that the kingdom is resigned to a period of lower oil prices, according to people familiar with the country’s thinking.”

Why isn’t one of the world’s largest oil producers pushing for the value of its top export to be as high as possible?

Well, the TL;DR is: in order for the price to be that high in the short term, the Saudis won’t be able to sell that much crude. Because everyone else is producing so much.

The Kingdom, along with members of the OPEC cartel and OPEC+ coalition, has seen their share of global oil production dwindle to sit near 30-plus year lows. A major part of this story is the ascendance of US shale. But there’s also been material output growth from the likes of Brazil and Guyana, as well.

OPEC+ has been restricting production to keep oil prices higher than they otherwise would be, and Saudi Arabia has been the player that’s withheld the most. The group, however, plans to begin returning more oil to markets in December despite a near 20% slide in the price of Brent crude oil since early July.

The implicit calculus here seems to be that the price versus volume trade-off is no longer worth it at these levels of volumes.

You know how McDonald’s became obsessed with value and the $5 meal deal after getting trounced by competitors who were better able to appeal to price-conscious consumers? You can sort of think of this as the oil market’s version of that dynamic.

Rory Johnston, oil market analyst who runs the Commodity Context substack, wrote an excellent series of tweets breaking down the situation.

Here are some of the highlights (slightly paraphrased, with permission):

Saudi Arabia thought it could get away with higher crude prices versus pre-COVID bc of less price-sensitive US shale growth, but then non-OPEC (and Iranian) supply growth reaccelerated again. 

The news should be primarily viewed in the context of the planned 2.2 MMbpd planned increase, running incrementally from December 2024 - November 2025. That output hike will almost certainly push markets into oversupply and depress prices vs current levels.

Saudi Arabia is signaling, for the short-term, less price sensitivity generally, which is a change. Many analysts (myself included) have expected more output hike delays because of their presumed sensitivity to lower crude prices. Saudis are now saying they'll tolerate lower prices.

In sum, this isn't a declaration of a price war (à la 2014 or 2020), but it does increase the likelihood that OPEC+ goes ahead with the currently planned December output hike, regardless of the potential negative impact on prices.