Saudi Arabia’s strategic move?

For a long time, OPEC+ has been managing supply to keep crude price stable amid demand destruction due to Covid-19 pandemic. In the latest, the OPEC+ had agreed in July 2021 to raise production by 400,000 barrels per day each month till December to relax the production cuts of last year before going into next year.

Demand has definitely improved during 2021 compared to last year, while production cuts helped support prices. However, after rallying in 1H2021, crude oil prices again came under pressure in the last two months due to the fast-spreading delta variant of coronavirus and the impeding economic slowdown.

While OPEC+ has been striving to maintain the price range of $65-75 a barrel by regulating output, oil prices at the beginning of September 2021 fell due to weaker than expected US economic recovery as highlighted by the US job report, which meant weaker demand for crude oil as Covid-19 continued its devastation. Some of the losses were limited by the US supply concerns due to Hurricane Ida.

The main jitters were sent in the crude oil market later that week when Saudi Arabia announced that it is slashing prices for all grades to Asia in October while keeping the prices for Europe and the US as is. The step is being labelled as a strategic move as KSA is the largest exporter of oil to Asia, and sell two thirds of its product to the continent. When the largest exporter slashes prices to the biggest consumer by more than a dollar per barrel, it surely means something is wrong with demand and economic recovery is weak. Analysts around the world are highlighting that the deep price cuts are due to rising delta variant and hence lockdowns across Asia to combat it.

And apparently, Saudi Arabia is trying to capitalize the situation and grab more market. With demand likely to improve especially from China due to inventory drawdown as well as the availability of cheaper crude, it is likely that increased supply from OPEC+ will lure buyers to return. The impact of the same in Arab light importing countries including Pakistan could be seen in increase of their imports.