Riyadh looks fed up with propping up the oil price and losing market share. But launching price wars is becoming more painful. wsj.com
Why is Saudi Arabia pumping more oil into an already-full market?
The Saudi-led OPEC+ group will return more than two million barrels a day of oil to the market by the fall if the cartel continues to unwind production cuts at its current rate. It is a U-turn for the group that spent the last two years curbing supply to boost the oil price.
Based on estimates from Goldman Sachs, the additional supply could leave the world with around one million barrels a day of oil more than it needs in 2025 and 1.5 million barrels too many next year.
Now seems an odd time to be opening the taps. The oil price was already falling in early April because of worries that President Trump’s trade war would cause a global recession and hurt energy demand. Immediately after “Liberation Day,” OPEC+ made things worse by announcing plans to unwind production curbs three times faster than anyone expected. Brent is down 8% since then to around $69 a barrel.
OPEC has a record of using global shocks as a cover to tank the oil price and take market share. Antoine Halff, co-founder of geoanalytics firm Kayrros, points out that the cartel opened the spigots during the 1997 Asian financial crisis and in the early days of the 2020 pandemic, when there was such a glut that the oil price briefly turned negative.
Lower oil prices can put high-cost competitors out of business, leaving low-cost producers to mop up. Saudi Arabia can break even on a barrel of oil even if prices fall to around $35, according to estimates from Rystad Energy.
Crude has been trading around the mid-$60s a barrel for several weeks. At this level, margins are tight for some U.S. shale players—particularly in the Bakken oil field where producers struggle to break even below this price.
This is causing a slowdown in American production. Since the beginning of 2025, the number of frack crews operated by publicly traded U.S. oil producers has fallen a fifth. The decline for private operators has been even sharper, data from Kayrros show.
The Saudis have sensed an opportunity to clip the wings of record U.S. crude production and curry favor with the White House at the same time. Much lower oil prices are not terrific for Russia either.
Trump wants low prices at the gasoline pump for consumers. Goldman Sachs analyzed the president’s energy-related social-media posts since he joined Twitter in 2009 and found that his preferred oil price, based on benchmark U.S. WTI prices, is between $40 and $50 a barrel. This gives the Saudis and OPEC the green light to push down the oil price.
Unloading more barrels onto the market also helps Saudi to slap the wrists of OPEC members such as Iraq and Kazakhstan that repeatedly overshoot their production quotas.
But pushing oil prices too low is risky. Trump is happy to see energy costs falling, but if they drop into the danger zone for U.S. domestic production, it could trigger a backlash. Keeping things friendly with America could help Saudi get its hands on chips for its AI investments and foreign capital for costly projects such as the futuristic city Neom.
Despite trying to diversify its economy, Riyadh still relies heavily on the money it makes from oil exports. The country’s transformation plans laid out in Vision 2030 are proving costlier than expected, and the International Monetary Fund estimates that Riyadh needs $92 oil to balance its books.
Falling energy prices are already causing a squeeze. The Saudi government’s oil revenue dropped 18% in the first quarter of 2025 compared with a year ago. Meanwhile, non-oil revenue increased only 2%. Goldman Sachs analysts estimate that if Brent averages around $62 this year, Saudi’s budget deficit could be more than double what the kingdom has penciled in.
Saudi Arabia may be starting a market-share grab, but it is likely to be a cautious one. |
