Oil prices crumble as Saudi Arabia throws in the towel on restricting supply
Oil prices continued their free fall on Friday as the market absorbed a double whammy of shocks after US President Donald Trump announced sweeping global tariffs and the Opec+ alliance decided to massively increase crude production.
The price of Brent, the international benchmark, has dropped more than 11 percent in two days, plunging from $74 per barrel at the beginning of this week to about $66 per barrel. The drop has put crude prices at their lowest levels since 2021.
The sell-off shows how Trump’s trade war is already unleashing secondary effects on the Middle East.
Gulf states, including Saudi Arabia, Kuwait and the UAE, sneaked through Trump’s trade broadside on Wednesday with just 10 percent tariff rates, but they are exposed to fears of a slowing global economy - which means less demand for crude and, therefore, lower prices.
At the same time, Opec+, an alliance of energy producers led by Saudi Arabia and Russia, added to the sell-off by abandoning its position of trying to support prices by restricting supply.
On Thursday, Opec+ shocked the energy world by announcing during a routine call that it would triple a planned output increase for May.
Saudi Arabia has been the main proponent of restricting the oil supply in a bid to lift prices. Thursday’s decision is an about-face for Saudi Energy Minister Abdulaziz nin Salman, who has earned a combative reputation, once warning market speculators that they would be “ouching like hell” if they doubted his willingness to starve the market of oil supplies.
But energy analysts have been warning for more than a year that Saudi Arabia is in an untenable position.
Saudi Arabia throws in the towel
Saudi Arabia has borne the brunt of restricting supply, losing market share in markets like China to Iran and India to Russia. Meanwhile, Opec members like the UAE have lobbied successfully to increase their quota limits, enjoying higher prices.
Iran and Russia have also been ramping up exports. Energy analysts say Saudi Arabia may have thrown in the towel and switched to bringing down prices to punish so-called “free riders” and enforce compliance. Saudi Arabia is especially upset at Kazakhstan and Iraq, which have churned out record crude production in defiance of their Opec quotas.
The risks for Saudi Arabia that this backfires are profound and are magnified by the tariffs threat to the global economy.
The kingdom is gambling that it can corral Opec members into obedience just as a trade war is fuelling recession risks.
Saudi Arabia needs oil at $90 per barrel to balance its budget, the International Monetary Fund says.
The kingdom is already scaling back mega-projects like Neom and tightening its purse strings on consulting firms that have raked up a windfall advising on Crown Prince Mohammed bin Salman’s Vision 2030 agenda to remake Saudi Arabia’s economy.
Saudi Arabia also has a host of poor neighbours like Lebanon, Egypt and Syria clamouring for financial assistance. The US also wants Gulf states to fund Gaza's reconstruction from Israeli bombardment.
In the short term, Saudi Arabia is going to gain goodwill with Trump, who has publicly called on Opec to increase supply. Lowering oil prices could dent the inflationary impacts of Trump’s tariffs.
The worst-case scenario for Saudi Arabia is that oil prices spiral further down, risking a price war like the one that erupted in 2020 between Russia and the kingdom during the coronavirus pandemic.