Saudis double down on seismic OPEC+ shift to sink oil prices

As Saudi Arabia’s Prince Abdulaziz bin Salman addressed his OPEC+ counterparts on a video call to ratify the group’s second huge supply increase in as many months, he invoked a surprising historical precedent: the 1973 oil embargo imposed by major OPEC nations that sent crude prices soaring.

The parallel to today, the prince suggested, was that the Organization of the Petroleum Exporting Countries had withstood tough times in the past — and its unity was just as crucial now. 

That cohesion is being tested. Saturday’s decision to push more output into an already-cratering oil market suggests Riyadh is doubling down on a radical strategy shift: after spending much of the past decade curtailing output to shore up the market, it’s now willing to drive down prices as it seeks to punish members who have cheated on their quotas. 

The move looks to set to deepen a rout in crude futures, which crashed to a four-year low below $60 a barrel last month following the alliance’s previous supply dump. It threatens to stoke fears of a price war within the cartel and squeeze the state budgets of producers including the Saudis themselves. 

But it’s also likely to mollify the most important fixture in Riyadh’s geopolitical firmament: US President Donald Trump, a longstanding critic of OPEC who has called for cheaper oil and will visit the region in just over a week. Such a gesture marks a sharp contrast with the 1970s supply shock, which aimed to punish western governments for supporting Israel during the Yom Kippur war.

Riyadh’s actions over the past month have dovetailed with those of the White House. Its surprise supply boost on April 3 came just hours after Trump launched a trade war against China and other economies that sent financial markets and oil futures into a tailspin. 

The next meeting had been set for May 5, but with less than a day’s notice the conference call was brought forward to Saturday. Like last month, the group agreed to unleash another 411,000 barrels per day in June. 

The prince’s history lesson was a sobering rebuke for Iraq and Kazakhstan, whose representatives sought to defend their inability to comply during the video call, said people who attended and asked not to be identified. It’s far from the first time Saudi Arabia has sought to punish recalcitrant countries into submission.

“A deliberate ‘sweating’ to instill discipline has occurred twice since 2014 — roughly five years apart — and both episodes continued until group cohesion was restored,” said Bob McNally, president and founder of Rapidan Energy Advisers LLC and a former White House energy official.  

Yet so far the “controlled sweating” has shown little sign of success. In Kazakhstan in particular, the government reiterated it has little influence on production decisions at projects that are operated by foreign firms, and and emphasized that revenue from oil production helps to support its population. 

The comments came just a day after Chevron Corp. Chief Executive Mike Wirth told analysts the company had received no instructions to rein in its massive Tengiz oil project that is largely responsible for a recent surge in Kazakhstan’s production. 

There could be further punishment in store. Russia, which jointly leads OPEC+, cautioned attendees that it — alongside the Saudis and the United Arab Emirates — has considerable unused production capacity to deploy, and urged fellow members to respect their quotas. 

“Russia, Saudi Arabia, the United Arab Emirates and Kuwait could all produce much more today. And we have potential projects and their development plans, but we are holding back production,” Deputy Prime Minister Alexander Novak said at the Saturday meeting of the OPEC+ countries, according to a broadcast by Russian state TV.

Yet the failure to discipline OPEC+’s quota violators has persuaded many analysts that Riyadh’s objectives lie outside the cartel. 

“With this move Saudi Arabia is seeking to punish lack of compliance particularly from Kazakhstan but also ingratiate with President Trump’s push for lower oil prices” said Jorge Leon, an analyst at Rystad Energy A/S, who previously worked at the OPEC secretariat.

The kingdom had long sought a deeper security ties with Washington, a partnership that grows all the more critical as Trump pursues a nuclear pact with the Saudis’ regional rival and fellow OPEC member, Iran. While the US’s negotiations with Tehran have been volatile, they could ultimately ease sanctions on its oil trade and strengthen the Islamic Republic’s regional standing. 

OPEC+ nations may also be seeking to recoup market share that the group yielded during years of cutbacks, and fend off the growth of rival producers in the US and other parts of the Americas. Years of supply restraint has helped finance their competitors and proved, to an extent, self-defeating.

“Today’s decision is a definitive message that the Saudi led group is changing strategy and pursuing market share after years of cutting production,” Leon said.