Saudi energy minister signals potential price war amidst OPEC tensions

The Saudi energy minister warned that oil prices could drop to $50 per barrel if OPEC members continue to exceed the production limits to which they have agreed. These words were interpreted by other OPEC members as a veiled threat to initiate a price war, according to The Wall Street Journal.

These words were said to have been spoken by Prince Abdulaziz bin Salman Al Saud, the Saudi energy minister, during last week's OPEC members' teleconference. Although the oil producers in this organization agreed to limit production to established levels, Iraq, Russia, and Kazakhstan are not adhering to these agreements and are extracting more, reports WSJ.

The service reminds that Saudi Arabia has already decided on price wars before. In March 2020, at the beginning of the COVID-19 pandemic, it did so in response to Russia's lack of agreement to reduce production, which other OPEC countries were advocating for. To punish Russia, Riyadh then increased production to record levels against market logic, and oil prices on global markets dropped significantly. The Saudis made a similar move in 1986.

The Wall Street Journal explains that despite rising tensions in the Middle East, oil prices - in terms of the several-month trend - are falling. A barrel of crude oil currently costs just under $74, and for West Texas Intermediate (WTI) - just over $70. Meanwhile, Saudi Arabia needs this price to hover at least around $85 per barrel. This amount allows Riyadh to earn enough to finance its ambitious economic transformation plan, explain analysts cited by WSJ.

So, as long as oil prices are far from the $85 mark, and additionally some OPEC countries are exceeding production limits and worsening the situation, Saudi Arabia might also decide to increase production to maintain its market share.

In June, OPEC countries decided to increase production in October. However, since the market situation does not allow this, a decision was made in September to maintain the current limits until December.

- Global markets are well supplied. It would require the destruction of regional reserves for a significant increase in oil prices - said Matt Gertken, chief strategist at BCA Research, a market advisory firm, in an interview with the weekly Barron's on Sunday. He commented on the killing of Hassan Nasrallah, the leader of the Lebanese Hezbollah, by Israeli forces and the impact of this event on the oil market.

- At this stage, a serious market reaction would require either a significant supply shock in oil production or distribution, a significant spread of war to major oil extraction areas, or a major military-political event leading to a larger conventional war threatening oil supplies - he insisted.

Meanwhile, on Tuesday, Iran fired dozens of rockets at Israel in retaliation for the death of the Hezbollah leader. Ayatollah Ali Khamenei threatened a "stronger and more painful" attack, and Israel promised retaliation. Oil prices increased, but the market reaction was minimal, noted Grzegorz Maziak, an analyst and editor-in-chief of the e-Petrol.pl portal, in an interview.

- This undermines the previous mechanism of market reactions. We probably had enough time to get used to the war threat situation in this region - he explained. - As long as these actions do not cause restrictions in the flow of oil, it seems prices will maintain their level - he added.

- Although the current political situation in the Middle East potentially destabilizes the oil market and favours increases, the poor economic situation in China and a drop in Chinese industrial production combined with high levels of global oil and fuel stocks favour lower oil prices - commented Dr. Kamil Lipiński, an analyst at the Polish Economic Institute.