Saudi Arabia to Instigate Price War to Gain Dominance? But the Plan Has a Weak Point

The global market is awash with oil, and all signs point to even more. Between April and the end of June, OPEC+ countries will produce an additional 960,000 barrels per day .

OPEC+ told Reuters the group could further accelerate production and bring back as much as 2.2 million barrels per day to the market by November.

Oil prices: Plenty of supply pushes Brent crude down

The group’s moves shocked the market, sending Brent crude prices below $60 a barrel on Monday, the breakeven point for many producers. It’s causing oil producers to think twice about investing in new drilling — especially in the United States .

As Reuters notes, Saudi Arabia launched a market share war in 2014 to stifle rapidly growing U.S. shale production. In 2020, it clashed with Russia at the height of the coronavirus pandemic. And now the kingdom is allowing more supply to flood markets at a time when it is at odds with Kazakhstan, Iraq and possibly the United Arab Emirates for repeatedly exceeding production quotas under the OPEC+ supply agreement.

This time, the Saudis’ supply-boosting strategy may not produce an adequate demand response, a necessary ingredient in any successful price war.

Historically, lower oil prices have generated higher demand, particularly in price-sensitive markets in Asia and the United States . Global demand rose by almost 2 million barrels per day in 2015, exceeding the average of 1.3 million barrels per day over the past decade, according to the International Energy Agency.

Oil prices: Trade war could reduce demand for oil

The 20% drop in oil prices since the start of the year is likely to have been driven mainly by concerns about the outlook for global demand due to U.S. President Donald Trump’s trade war, particularly with China.

A slowdown in freight traffic between the world’s two largest economies and warnings from major multinationals suggest tensions could linger for months, if not years. So there’s no guarantee that a sharp drop in oil prices will trigger a significant increase in demand.

Saudi officials have been telling market participants behind closed doors that the kingdom is ready and able to withstand a price drop , Reuters reported. That’s partly because of the country’s ability to access debt. The Saudi Public Investment Fund (PIF) has raised $11 billion in sukuk, or Islamic bonds, this year and aims to raise an additional $2 billion in the coming weeks.