Saudi minister's warning ignites fears of falling oil prices
The Saudi Energy Minister has warned that oil prices could fall to £40 per barrel if OPEC members continue to exceed their agreed production limits. According to The Wall Street Journal, other OPEC members saw these statements as a veiled threat to initiate a price war.
These remarks are said to have been made by Prince Abdulaziz bin Salman Al Saud, the Saudi Energy Minister, during last week's OPEC members' teleconference. Although the oil producers within this organisation have agreed to limit production to set levels, Iraq, Russia, and Kazakhstan are not complying with these agreements and are extracting more, reports WSJ.
The journal reminds us that Saudi Arabia has previously engaged in price wars. In March 2020, at the onset of the COVID pandemic, it did so in response to Russia's refusal to agree to production cuts that other OPEC countries were advocating for. In retaliation, Riyadh increased production to record levels against market logic, causing oil prices on global markets to drop significantly. The Saudis made a similar move in 1986.
Will they engage in a price war?
The Wall Street Journal explains that despite rising tensions in the Middle East, oil prices have been falling for several months. A barrel of crude oil currently costs just under £60, and for WTI, just over £56. Meanwhile, Saudi Arabia needs this price to be at least around £68 per barrel. Analysts cited by the WSJ explain that this amount enables Riyadh to generate enough revenue to fund its ambitious economic transformation plan.
So, as long as oil prices are far from the £68 mark, and additional production from some OPEC countries exacerbates the situation, Saudi Arabia might also opt to increase production to maintain its market share.
In June, OPEC members decided they would increase production in October. However, given the current market conditions, a decision was made in September to maintain the current limits until December.
The situation in the Middle East is escalating. What does this mean for oil?
“Global markets are well supplied. A significant increase in oil prices would require the destruction of regional reserves,” said Matt Gertken, chief strategist at BCA Research, a market advisory firm, in an interview with the weekly Barron's on Sunday. He commented on the killing of Hassan Nasrallah, the leader of the Lebanese Hezbollah, by Israeli forces, and the impact of this event on the oil market.
“At this stage, a serious market reaction would require either a significant supply shock in oil production or distribution, a considerable spread of war to major oil extraction areas, or a major military-political event leading to a larger conventional war threatening oil supplies,” he insisted.
Meanwhile, on Tuesday, Iran fired dozens of rockets at Israel in retaliation for the death of the Hezbollah leader. Ayatollah Ali Khamenei threatened a "stronger and more painful" attack, and Israel promised retaliation. Oil prices increased, but the market reaction was minimal, noted Grzegorz Maziak, an analyst and editor-in-chief of the e-Petrol.pl portal, in an interview with money.pl.
“This undermines the previous mechanism of market reactions. We probably had enough time to get used to the war threat situation in this region,” he explained. “As long as these actions do not cause restrictions in the flow of oil, it seems prices will maintain their level,” he added.
“Although the current political situation in the Middle East potentially destabilises the oil market and favours increases, the poor economic situation in China and a drop in Chinese industrial production, combined with high levels of global oil and fuel stocks, favour lower oil prices,” commented Dr. Kamil Lipiński, an analyst at the Polish Economic Institute, to money.pl.
