Saudi Arabia braces for “long and shallow” oil cost war

Saudi Arabia braces for a “long and shallow” oil price war which will partly weaken US shale producers, according to the Bank of America’s top commodities analyst, the Middle East reported on June 9th.

“It’s not a price war that is going to be short and steep; rather, it’s going to be a price war that is long and shallow,” said the bank’s head of commodities research, Francisco Blanch, in an interview with Bloomberg.

In a sharp policy shift, Saudi Arabia led Opec+ to enhance supply, reversing years of pushing for production cuts to heighten energy costs. Saudi Arabia’s Energy Minister Abdulaziz bin Salman warned speculators they would be “ouching like hell” if they underestimated his resolve to restrict supply.

Analysts have long warned that Saudi Arabia’s position was unsustainable. The kingdom had carried the burden of output cuts, while other producers earned the benefits of elevated prices. Meanwhile, Saudi Arabia lost market share in Asia to Iran and Russia.

“They’ve [Saudi Arabia] done this price support already by themselves for three-plus years,” Blanch said. He added: “They’re done with that.”

Abu Dhabi secured higher output quotas and now rushes to pump more oil before global demand peaks. Saudi Arabia’s latest supply boost also targets Iraq and Kazakhstan. But with deeper pockets and faster extraction capabilities, Riyadh can weather a prolonged slump better than many partners.

The Bank of America’s evaluation identifies another key target: The US. During the past 15 years, American shale production surged, making the US independent with regards to energy. America’s Oil and gas output reached a record high in December last year. It raises the question as to why Saudi Arabian allies, such as the UK and Egypt, have strengthened their existing ties recently.

Despite plunging revenues, Saudi Arabia continues issuing debt to plug budget gaps. It has already started scaling back mega-projects like Neom and cut spending on foreign consultants involved in Vision 2030, an initiative to rebuild Saudi Arabia’s economy.

If prices fall further, Riyadh risks triggering a dilemma similar to the 2020 oil price war between Saudi Arabia and Russia.

Middle East Eye, Reuters