Oil markets are dipping a bit this morning after closing at a fresh 3-month high yesterday, with crude oil ending the session above $115. Saudi Arabia seems to be prepared to ramp up supply, after years of maintaining production discipline under the OPEC+ agreement. The prospect of increased oil output caused an early morning selloff, though prices have since reduced losses to less than $1.20/bbl.
During the peak of the COVID-19 crisis, a coalition of countries led by Saudi Arabia and Russia agreed to historic production cuts to balance cratering markets. Since then, the OPEC+ group has very slowly ramped supply back towards pre-COVID levels, with current projections that the deal will be complete by September. Even after the Russian invasion of Ukraine, Saudi Arabia held firm, declaring there was no crude supply emergency even as consuming countries tapped their emergency petroleum reserves.
The EU’s latest ban on Russian oil, though, seems to have tipped the political scales in Saudi Arabia in favor of capturing more market share. With Russian oil now expected to decline by 1 million barrels per day or more, Saudi officials are reportedly prepared to fill in any shortcomings. President Biden is expected to travel to Saudi Arabia this month to discuss increasing oil production.
Other members of OPEC have been struggling to increase their production to keep up with rising quotas, but the Saudis still have room to increase production. According to the EIA, OPEC countries had 2.8 million barrels per day of excess production capacity as of May 2022, in line with the historical average. OPEC rarely drops below 2 MMbpd of spare capacity because of various domestic and technological challenges. Still, even a small increase could be impactful, tilting the scales from a severe outage to balanced. If nothing else, Saudi Arabia’s comments may help keep a lid on the market for the time being, preventing some of the $8/gal fuel costs that some in the media have forecast.