For the past few months, we have been of the view that OPEC+ had pivoted to a market share strategy over a price defense strategy. Saudi Arabia wanted OPEC+ to continue with accelerated oil supply hikes in the coming months as it put greater importance on regaining lost market share. Bulk of the output cut for the past 2 years has been born by Saudi. But all the market share loss had been for a futile cause. Shale producers & non opec members have garnered Saudi market share. With oil revenues coming down, Saudi Arabia’s budget deficit ballooned in the first quarter of CY25. The kingdom posted a fiscal deficit of 58.7 billion riyals ($15.7 billion), the highest figure since late 2021 and already well over half the government’s expected gap for 2025 of 101 billion riyals. The kingdom’s deficit may soar to $67 billion this year because of lower oil prices, more than double the government’s current forecast. And this was continuation of deficit trend since Q3CY22 from where the output cuts have begun taking place. No wonder Saudi has decided to regain market share now rather than defending crude price. In today’s OPEC meeting, it decided to increase oil production even more rapidly than expected next month. While the market was expecting another 411kbpd output hike from next month, OPEC decided to hike output by 548kbpd. This will put the group on way to unwind its most recent layer of output cuts one year earlier than originally outlined. The cartel will consider adding another roughly 548,000 barrels a day in September at the next meeting on Aug. 3 which would complete the revival of 2.2 million barrels a day of supply shuttered in 2023. After that, the group has another 1.66 mbpd of idle output to potentially consider. With global demand expected to be weak due to trade wars & tariffs, Chinese demand also remaining weak due to both weak consumption as well as onset of NEVs (New Energy Vehicles), we can expect the oil inventories to rise further in light of faster output increase from OPEC. Saudi’s efforts to regain market share will drive brent prices lower during next few months. We should initially see the 60$ levels being tested on Brent and then a subsequent breach if world growth slows down as we expect tariffs and trade uncertainties play out. To us the recent crude rally due to Iran conflict was a golden opportunity to hedge for crude producers.
