Saudi Arabia, the kingpin of the Organization of the Petroleum Exporting Countries and allies, seems prepared to test the oil market as well as cartel members with strong commitment to bring barrels to the market amid a lower price environment.
Almost five years ago, Saudi Arabia’s Energy Minister warned speculators to “watch out,” threatening severe consequences.
It now seems the focus has shifted from speculators to the OPEC+ alliance, according to ING Group.
“The Saudis are the driving force behind larger-than-scheduled supply increases to punish members who’ve repeatedly produced above their targets,” Warren Patterson, head of commodities strategy at ING Group, said.
In April, OPEC+ unexpectedly boosted supply by 411,000 barrels per day (bpd) for May, exceeding the planned 135,000 bpd increase.
The group has now decided to implement a similarly large supply increase for June.
OPEC+ initially planned to restore 2.2 million bpd of supply over 18 months, until September 2026.
However, within three months, the group agreed to reinstate nearly 1 million bpd of supply.
Reports indicate that Saudi Arabia has warned of comparable large supply increases in the coming months should member states fail to adhere to their production targets.
“This could mean that the full 2.2m b/d of supply is brought back to the market by the start of the fourth quarter of this year — 12 months ahead of schedule,” Patterson added.
How long can the Kingdom tolerate lower oil prices?
Amid tariff risks causing significant demand uncertainty, the oil market now faces added supply-side uncertainty due to a change in OPEC+ policy.
Further increasing this uncertainty, the group will make monthly decisions regarding output levels, with the decision on July’s output scheduled for June 1.
“The key to knowing how far the Saudis will take what is starting to look like a price war is the nation’s tolerance for low oil prices over time,” Patterson noted.
Saudi Arabia requires approximately $90 per barrel of oil to balance its fiscal budget, a significant margin above current prices, according to ING Group.
One potential strategy for Saudi Arabia to decrease their fiscal breakeven point is to increase oil production, Patterson said.
“Obviously, this also depends on how much lower prices trade amid increased supply.” Patterson said.
The widening gap between their fiscal breakeven level and current oil prices means that the Saudis will have to cut spending and/or tap debt markets.
May-July right time to increase output
OPEC+ will probably implement a modest and flexible increase in supply for June, strategically considering the anticipated rise in crude oil demand during the summer season.
“If the group wants to test the market with a higher than anticipated increase, the time is now,” Mukesh Sahdev, senior vice president, global head oil commodity markets at Rystad Energy, said in an emailed commentary.
While summer fundamentals appear strong, this positive outlook is expected to shift after June-July.
Sahdev noted:
This could potentially be higher as many non-OPEC+ suppliers come out of maintenance and refineries will shift into maintenance mode for Q4 and tariffs will likely dampen demand.
Despite projections of GDP contraction and demand growth falling below 1 million bpd, an OPEC+ unwind seems unlikely. Current guidance suggests an oil surplus this year.
However, analysing fundamentals from May to August indicates tighter balances due to seasonal growth, according to Rystad Energy.
This is primarily driven by a stronger growth in refinery runs at 2.0 million bpd compared to OPEC+ output, coupled with lower non-OPEC+ supply growth, Sahdev noted.
Scheduled maintenance in non-OPEC+ nations such as Canada and Norway presents an opportunity for the cartel to strategically reverse production adjustments up to June, he added.
Compliance with output cuts
Kazakhstan aims to prioritize its national interests and intends to increase oil supply, signaling a divergence from OPEC+’s objective for member states to adhere to production quotas.
US energy giants such as ExxonMobil and Chevron operating in Kazakhstan are likely to be significant contributors to the expansion of supply.
The prospect of US support brings into focus the possibility of leveraging this backing to influence OPEC+ to increase oil production–an objective the US has been actively pursuing.
Source: Commerzbank Research
On the other hand, several factors might incentivise Kazakhstan to remain within the OPEC+ framework and adhere to the established production quotas.
Kazakhstan heavily relies on Russia for oil export, with approximately 95% of its oil transported through Russian infrastructure, and currently lacks alternative export routes.
OPEC+ could exert influence over Kazakhstan’s oil production via Russia by suggesting extended maintenance shutdowns of the CPC export terminal.
Importing Russian gas to gasify eastern and northern Kazakhstan is a beneficial project for the country, addressing its growing domestic gas and energy demand.
This initiative could be integrated into OPEC+ and Russia’s discussions with Kazakhstan, according to Rystad.
Sahdev said:
Saudi Arabia’s position to increase production and start a price war pose a risk to Kazakhstan’s economy, which is highly sensitive to oil prices.
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