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Saudi Oil U-Turn Would Mark Third Supply Surge That’s Backfired

Three strikes and you’re out?

Saudi Arabia — the world’s biggest crude exporter — may be on the verge of cutting production again. That would mark the third time in recent years the kingdom has delivered a supply surge only to quickly reverse it.

OPEC, which is largely steered by Riyadh, boosted production to near-record levels over the summer to offset supply losses from Iran and Venezuela. The result: oil prices have slumped 19 percent since early October on concerns that markets face a looming oversupply.

History suggests opening the taps is an ill-fated strategy. The Saudis pushed output to record levels in 2016, maximizing sales just before an OPEC agreement to cut supply came into effect. That move backfired by swelling inventories in early 2017, meaning OPEC’s efforts to clear a global glut took much longer than planned.

Before that, the kingdom ramped up output in mid-2015 while it waged a price war against U.S. shale drillers, seeking to drive its American rivals out of business. The Saudis soon came to rue that move. When prices plunged in early 2016, it ended up pursuing an accord — that ultimately failed — with fellow producers to “freeze” output.

Admittedly, the latest surge wasn’t entirely Riyadh’s decision. In the spring, the kingdom had been intent on restraining supply, until it came under pressure from U.S. President Donald Trump, who sought its support while imposing sanctions on fellow oil producer Iran.

But the end result could be the same: falling prices and a forced U-turn.
Source: Bloomberg

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