Saudi Arabia’s oil production cut a risky strategy

For years, Saudi Arabia has vowed to intervene in the oil market only in concert with OPEC bigwigs — and rarely, if ever, alone.

Call it the oil version of “all for one, one for all.” On Sunday, Riyadh threw away its own rule book, announcing a unilateral output cut that would push the country’s production down to levels rarely seen in the last decade, reports Japan Times.

The market reaction? Meh. Oil rose a lackluster 2% in early trading on Monday, with Brent still below $80 a barrel.

Few Saudi officials understand better than Prince Abdulaziz bin Salman the “never alone” mantra. The current Saudi oil minister attended his first OPEC meeting in 1987. It was a teaching moment for the young royal. For several years, Riyadh had cut oil production unilaterally to support prices, ceding market share to rivals inside and outside OPEC. At one point in late 1985, with output barely covering domestic consumption, the kingdom threw in the towel and sharply boosted output, triggering a price collapse.

So why has Prince Abdulaziz, a critic of previous Saudi ministers who acted alone, taken the solo route?

On Sunday, Riyadh announced it will reduce output by 10% in July. Coming on top of cuts in May and June, which only included a handful of OPEC nations rather than the whole group, it would reduce Saudi output to 9 million barrels a day. Excluding a period during the COVID-19 pandemic, when demand plunged, Saudi oil output would drop to a level unseen in more than a decade. Riyadh regularly pumped more than 9 million barrels a day in 2003 and again from 2005 to 2008.

The cut is meant to be only for July, but the Saudis indicated it may be extended if needed. Oil traders reckon that’s likely. Prince Abudlaziz said the cut highlighted how the kingdom “will do whatever is necessary to bring stability to this market.” For stability, read higher oil prices.

Because Riyadh is forfeiting so much production, unless prices rally over the next few days it would end giving up an enormous amount of petroleum revenue. Everyone else inside the OPEC+ alliance would reap the benefits. To keep earnings unchanged, Riyadh needs oil to surge by more than $10 a barrel to offset the drop in production from April to July.