Saudi Arabia's Minister of Energy, Prince Abdulaziz bin Salman, warned that if the members of the oil-producing alliance OPEC+ do not adhere to production quota restrictions, oil prices could plummet to $50 per barrel. In response, some member countries interpreted this as a threat from Saudi Arabia, suggesting that if they violate production limits, it would trigger a price war.

What exactly is happening, and why is Saudi Arabia so "angry"?

01 Saudi Warning Sparks "Price War" Concerns

The warning issued by Saudi Arabia to OPEC+ member countries is like a boulder thrown into a tranquil lake, garnering widespread global attention. This warning is not baseless but is a judgment made based on the current complex oil market situation.

In recent years, the oil market has been in a state of flux.

On one hand, the global economic growth has slowed down, leading to a decrease in demand for oil. According to data from the International Energy Agency, this year OPEC+'s share in the global oil market is 48%, lower than 50% in 2023 and 51% in 2022, indicating that competition in the oil market is intensifying.

On the other hand, some OPEC+ member countries have failed to strictly comply with production restriction agreements, leading to an oversupply in the market.

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For instance, Iraq's daily production exceeded the quota by 400,000 barrels in August, and Kazakhstan's production also rose with the recovery of the Tengiz oilfield. Additionally, Russia's production as of July this year has also exceeded its quota.As a key member of OPEC+, Saudi Arabia has been committed to maintaining the stability of the oil market. As previously reported by Wangye Finance, Saudi Arabia needs an oil price of $85 per barrel to assist in its domestic economic transformation. Therefore, in response to other member countries' disregard for production limits, Saudi Arabia has had to issue stern warnings.

Undoubtedly, if the oil price were to truly plummet to $50 per barrel, it would have profound effects on the global economy. For oil-exporting countries, this would be a disaster, with a sharp decrease in fiscal revenue and hindered economic development. On the other hand, for oil-importing countries, although low oil prices can reduce costs, they may also trigger issues such as inflation.

In summary, Saudi Arabia's warning highlights the current instability and uncertainty in the oil market. In the future, whether OPEC+ member countries can adhere to the production limit agreement will become a key factor in determining the trend of international oil prices.

02 In-depth Analysis of the Underlying Reasons

2.1 Impact of Overproduction by Some Countries

Iraq, Kazakhstan, and Russia have exceeded their quotas in production this year, posing a significant challenge to the production reduction plan.According to the latest survey data from Platts Energy Information, Iraq and Kazakhstan's production far exceeds the reduction quotas, and Russia's production as of July this year also exceeded the stipulated amount.

Iraq's daily production exceeded by 400,000 barrels in August, and Kazakhstan's production is also increasing with the recovery of the Tengiz oilfield.

These overproduction behaviors have weakened the market's confidence in the production reduction agreement, which may trigger other countries to follow suit, greatly reducing the effectiveness of the implementation of the production reduction agreement. If this situation continues, international oil prices will face greater downward pressure.

2.2 Market Share and Competitive Pressure

OPEC+ production cuts mean a reduction in its share in the oil market.

Data from the International Energy Agency (IEA) shows that its share this year is 48%, lower than 50% in 2023 and 51% in 2022.

At the same time, countries such as the United States, Guyana, and Brazil are increasing production, which is expected to add more than 1 million barrels/day to global oil supply. Brazil joined OPEC+ this year but stated that it will not participate in production cuts.

This competitive situation makes the pattern of the oil market more complex, and OPEC+ faces tremendous competitive pressure.

In the face of the continuous compression of market share, OPEC+ member countries need to seriously consider how to balance the relationship between production cuts and market share.

2.3 Economic Transformation Demand DrivenSaudi Arabia needs an oil price of $85 per barrel to help its domestic economy undergo transformation. While Saudi Arabia has made some progress in economic diversification, energy remains the primary source of revenue for the Saudi government.

According to the latest forecasts released by the IMF, Saudi Arabia requires an oil price close to $86 per barrel to balance its budget.

However, the current oil prices are far below this level, presenting a significant challenge to Saudi Arabia's economic transformation.

In this context, Saudi Arabia has had to take measures to maintain oil prices to ensure the smooth progress of its economic transformation plans.

03 Review of Saudi Arabia's Historical Oil "Price Wars"

In fact, historically, Saudi Arabia has launched several oil price wars, the most recent being in 2020.

It is worth mentioning that as early as 2020, a fierce oil price war erupted between Saudi Arabia and Russia.

The catalyst for this price war was Russia's refusal to agree to OPEC's proposal for an additional reduction of 1.5 million barrels per day. Saudi Arabia immediately took action by lowering the official oil price for April 2020 by $6 to $8 and announced that it would provide 12.3 million barrels per day of crude oil starting in April, nearly 2 million barrels per day higher than the March estimate.

US oil WTI and international Brent both plummeted "epically" by 24% to 26% on March 9, 2020, marking the largest single-day drop and the lowest in four years since 1991. Global stock markets also suffered a significant decline, with many energy stocks experiencing double-digit drops that day. Subsequently, Russia and the third-largest oil-producing country in OPEC, the UAE, both announced that they would increase production.Russia claims that it can rapidly increase production by 200,000 to 300,000 barrels per day in the short term, and by 500,000 barrels per day in the long term. The United Arab Emirates states that its production in April of that year may increase by nearly 1 million barrels per day.

As a result, in the first quarter of 2020, international oil prices plummeted by more than 60% overall, setting an eighteen-year low. At that time, there were no shortage of analysts with pessimistic expectations that the major oil-producing countries' actions to increase production might continue until at least June 2020. Coupled with the demand disruptions caused by the pandemic, this directly led to the U.S. WTI May crude oil futures price falling to a negative value on Beijing time April 21, 2020, marking the first time in history.

Since 1980, Saudi Arabia has initiated three oil price wars, all attempting to打击 competitors by increasing production and lowering prices, which occurred in 1985-1986, 1997-1998, and 2014-2015.

During the 1985-1986 price war, Saudi Arabia's oil production increased from 3.175 million barrels per day to 4.784 million barrels per day in 1986, with Dubai crude oil prices falling from $27 per barrel at the end of 1985 to $10.58 per barrel in June 1986.

In the 1997-1998 price war, to打击 Venezuela's oil industry, Saudi Arabia increased its oil production from 9.5 million barrels per day to a peak of 9.9 million barrels per day in March 1998, with Brent crude oil prices falling from $20 per barrel at the end of 1997 to $14 per barrel in March 1998.

During the 2014-2015 price war, to打击 U.S. shale oil, Saudi Arabia increased its oil production from 11.55 million barrels per day to 12.4 million barrels per day in June 2015, with Brent crude oil prices falling from $80 per barrel at the end of 2014 to $50 per barrel in January 2015.

These historical price wars indicate that when the interests of oil-producing countries cannot be balanced, or when market share is threatened, Saudi Arabia often takes decisive action to maintain its position and interests through price wars. These price wars have also brought significant shocks and uncertainties to the global oil market.