ES #133: Saudi-U.S. Price War or Preemptive Supply Elasticity?

Energy Shots #133

Heading into May 2025, global crude market participants are focused on the scheduled production increases from the eight OPEC+ ‘voluntary cut crew’ members that will collectively raise output by 411,000 b/d, accelerating the previously agreed-upon pace of unwinding voluntary cuts initiated in late 2023. This increment effectively brings forward three months' worth of planned additions into a single month.

• Saudi Arabia: Leads the increase, adding over 200 kb/d to reach a target of 9.2 MMb/d.

• Other Key Contributors: Russia, Iraq, UAE, and Kuwait also contribute significantly to the May ramp-up.

• Context: This unwinding follows a period where voluntary cuts (totaling 2.2 MMb/d) and existing mandatory cuts have kept significant OPEC+ capacity offline (approx. 5.86 MMb/d total, or ~5.7% of global demand).

• Note: May’s scheduled production increase was framed as an opportunity for consistent overproducers (Kazakhstan, Iraq, UAE) to compensate for surplus output between 2024 and early 2025. However, stakeholders should consider that past compensation pledges have yielded little real compliance— overproducers have typically continued to exceed their quotas. Total DoC output was already 363 kb/d higher than pledged production in February.

While potential supply disruptions related to sanctioned producers like Iran and Venezuela remain a factor, the prevailing supply/demand balance, coupled with this front-loaded OPEC+ increase, presents a material risk of downside price pressure as market participants question whether global demand can comfortably absorb returning supply.

Recent market action reflects this uncertainty.

• The May ‘25 WTI contract settled at $64.68 with three days before expiry. If sustained through the contract’s Apr 24th expiry, this would mark the lowest settlement since September 2021.

• Similarly, the OPEC Reference Basket Price has averaged $69.76 in April-to-date – its weakest since May 2021. Adjusting for inflation (PCE, 2017 dollars), the April OPEC Basket Price falls to approximately $55.17, the lowest inflation-adjusted monthly average since January 2021.

This backdrop raises the question: how do OPEC's most influential producers, particularly Saudi Arabia, historically adjust output in response to varying price environments?

Energy Shots #133 dissects Saudi Arabia's historical production behavior to evaluate the Kingdom’s production tendencies in various low, medium, and high-price regimes.

Accelerated Growth in High-Price Regimes:

• Saudi Arabia's production grows significantly faster when oil prices are historically high (top deciles). Analysis shows 6-month forward growth averaging +7.91% in the 8th price decile and +3.53% in the 10th decile, contrasting sharply with negative growth in the lowest deciles (e.g., -7.45% in the 1st decile).

Strategic Deviation from Baseline Trends:

• Compared to its low long-term baseline growth trend (+0.41% annually), Saudi Arabia produces substantially above this trend during high prices (e.g., +7.71% above baseline over 6 months in the 8th price decile). Conversely, during low prices, production growth falls significantly below baseline (e.g., -8.14% below baseline over 6 months in the 1st price decile).

Elasticity & Deceleration

• Elasticity: Saudi Arabia exhibits a statistically significant positive elasticity to price changes over 6-month (+0.05) and 12-month (+0.24) horizons. This means, on average, they tend to increase production growth as prices rise over these periods.

• Deceleration: However, analysis of growth acceleration (the rate of change of the growth rate) reveals a statistically significant deceleration over 12 months in response to price increases. Saudi Arabia reduces its production growth rate by 0.11% for each 1% increase in oil prices over a 12-month period (p=0.0025).

Comparison with Other OPEC Producers & Broader OPEC Context

While UAE and Kuwait also show higher growth in high-price regimes, Saudi Arabia's specific patterns of growth differentials and deceleration are distinct.

• Kuwait: Shows positive 6m (+0.18) and 12m (+0.11) elasticity, similar to Saudi Arabia, but also demonstrates statistically significant deceleration in growth during price increases over both 6m (-0.15%) and 12m (-0.13%).

• UAE: Shows positive 3m (+0.30) and 12m (+0.03) elasticity, but no statistically significant relationship for 6m elasticity. Like Saudi Arabia and Kuwait, UAE shows significant deceleration over 12m (-0.14%) but not over 6m.

Takeaways for May 2025 Production Growth

Given the recent price weakness pushing markets towards the lower-middle range of historical inflation-adjusted prices, Saudi Arabia is likely producing below its baseline trend, consistent with observed behavior in weaker price regimes (Deciles 1-5 showing negative 6m growth differentials).

In light of planned production growth in May 2025 amidst 4th decile (inflation-adjusted) prices, the Kingdom’s historical tendencies indicate elevated odds for two scenarios that warrant domestic crude-centric producers’ attention:

1. Preemptive supply elasticity ahead of forthcoming geopolitical supply disruptions (e.g., Iran, Venezuela)

2. Sustained downside pressure on prices to leverage lower marginal cost of production and recapture market share as the outlook for shale-led U.S. production growth deteriorates.

Several factors that are beyond the scope of Energy Shots #133 should be considered, such as the recent washout of speculative short positions and ongoing uncertainty about the effects of U.S.-led trade negotiations on global economic activity.

Please reach out to the Mobius team for portfolio-specific discussions and scenario modeling.

See you next Sunday.

ES.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation concerning the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is intended for Mobius clients only and is not considered promotional material.