Saudi Prince warns of $50 oil: Opec discord and price war threat

The Saudi energy minister warned that oil prices could drop to $50 per barrel if OPEC members continue to exceed their agreed-upon production limits. According to The Wall Street Journal, other OPEC members interpreted this as a veiled threat to initiate a price war.

This statement was made by Prince Abdulaziz bin Salman Al Saud, the Saudi energy minister, during last week's teleconference of OPEC members. 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 than the agreed-upon amounts, reports WSJ.

It is worth noting that Saudi Arabia has resorted to price wars in the past. In March 2020, at the beginning of the COVID pandemic, it responded to Russia's refusal to reduce production as other OPEC countries advocated. To punish Russia, Riyadh then increased production to record levels, resulting in a significant drop in oil prices on global markets. The Saudis made a similar move in 1986.

The Wall Street Journal explains that despite rising tensions in the Middle East, oil prices have been trending downward over several months. A barrel of crude oil currently costs just under $74, while WTI is priced at just over $70. Meanwhile, Saudi Arabia needs oil prices to hover around at least $85 per barrel. Analysts cited by the WSJ explain that this amount allows Riyadh to earn enough to finance its ambitious economic transformation plan.

As long as oil prices remain far from the $85 mark and some OPEC countries continue to exceed production limits, thereby worsening the situation, Saudi Arabia might decide to increase production to maintain its market share.

In June, OPEC countries decided they would increase production in October. However, since the market situation does not permit 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 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 slightly, but the market reaction was minimal, noted Grzegorz Maziak, an analyst and editor-in-chief of the e-Petrol.pl portal, in an interview with money.pl.

"This undermines the previous mechanism of market reactions. We probably had enough time to get used to the constant threat of war 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, the poor economic situation in China and a drop in Chinese industrial production, combined with high levels of global oil and fuel stocks, favor lower oil prices," commented Dr. Kamil Lipiński, an analyst at the Polish Economic Institute, to money.pl.