Saudi Arabia signals it can live with lower oil prices, sources say

Saudi Arabian officials are briefing allies and industry experts to say the kingdom is unwilling to prop up the oil market with further supply cuts and can handle a prolonged period of low prices, five sources with knowledge of the talks said.

This possible shift in Saudi policy could suggest a move toward producing more and expanding its market share, a major change after five years spent balancing the market through deep output as a leader of the OPEC+ group of oil producers.

Those cuts supported prices, in turn bolstering the oil export revenue that many oil producers rely on.

The Saudi government's communications office did not reply to a Reuters request for comment on the matter.

Riyadh has been angered by Kazakhstan and Iraq producing above their OPEC+ targets, the sources said. The group establishes those targets to keep supply and demand balanced in oil markets.

After pushing members to adhere to those targets and to compensate for oversupply in recent months, a frustrated Riyadh is changing tack, OPEC+ sources said.

Saudi Arabia pushed for a larger-than-planned OPEC+ output hike in May, a decision that helped send oil prices below $60 a barrel to a 4-year low.

Lower prices are bad news for producers that rely on oil exports to fund their economies.

Although producers like Saudi have a very low cost of production, they need higher oil prices to pay for government spending. When oil prices fall, many large oil-producing countries come under pressure to cut their budgets.

The Saudis appear to be briefing allies and experts that they are ready to do just that.

Saudi officials in recent weeks have told allies and market participants the kingdom can live with the fall in prices by raising borrowing and cutting costs, the five sources said.

"The Saudis are ready for lower prices and may need to pull back on some major projects," one of the sources said. All sources declined to be named due to sensitivity of the issue.

Saudi Arabia needs oil prices above $90 to balance its budget, higher than other large OPEC producers such as the United Arab Emirates, according to the International Monetary Fund (IMF).

Saudi Arabia may need to delay or cut back some projects due to the price drop, analysts have said.

NOT A PRICE WAR YET

OPEC+, which includes the Organization of the Petroleum Exporting Countries and allies such as Russia, may decide to speed up output hikes again in June, OPEC+ sources have said.

OPEC+ is cutting output by over 5 million barrels or 5 percent of global supply, to which Saudi Arabia is contributing two-fifths.

Russia, the second largest exporter in OPEC+ behind Saudi Arabia, is aware of Riyadh's plans for faster output increases, said two of the five sources who are familiar with the Russian thinking and conversations with Riyadh.

Russia would prefer the group stick to slower output increases, the two sources said.

Russian Deputy Prime Minister Alexander Novak's office did not reply to a request for comment.

Saudi Arabia and Russia, the de facto leaders of OPEC+, make the biggest contributions to OPEC+ cuts.

Russia's budget balances at about $70 a barrel and the Kremlin's spending is on the rise due to the Russian war in Ukraine.

Russia may see a further fall in revenue as prices for its discounted, sanctioned oil could fall below $50 a barrel as a result of OPEC+ output rises, one of the two sources said.

REASONS FOR CHANGE

Theories on the apparent change in Saudi strategy range from punishing OPEC+ members exceeding their quotas to a move to fight for market share after ceding ground to non-OPEC+ producers such as the United States and Guyana.

Higher output may also be a fillip to US President Donald Trump, who has called for OPEC to boost output to help keep US gasoline prices down.

Trump is due to visit Saudi Arabia in May and could offer Riyadh an arms package and a nuclear agreement.

OPEC+ decided to triple its planned output increase to 411,000 bpd.

That still leaves OPEC+ holding back more than 5 million bpd, curbs the group aims to unwind by the end of 2026.

"We would still call this a 'managed' unwind of cuts and not a fight for market share," UBS analyst Giovanni Staunovo said.