Saudi Arabia may wage oil 'market share war' against the US, reversing output cuts and unleashing a flood of supply, energy expert says

• Saudi Arabia may wage a "market share war" against the US and flood oil markets with supply, energy expert Paul Sankey said.
• That would mark a reversal from Riyadh's strategy of curbing production to boost oil prices.

Saudi Arabia is struggling to boost oil prices with production cuts and may soon make a dramatic reversal aimed at the US, according to energy expert Paul Sankey.

In an interview with Business Insider, he said Saudi Arabia may pivot to ramping up production to flush the market with a flood of supply in the first half of 2024. And that's not to target emerging producers like Guyana or Brazil.

"You've got to attack the guy that's making the marginal decision to drill or not — and that guy is Mr. Permian Basin," Sankey said, referring to the US shale epicenter.

He later added, "I think to be specific, it's a market share war."

Saudi Arabia is currently producing about 2.5 million barrels a day below maximum capacity. If the country follows through with additional supplies that sink crude prices, the goal would be to essentially "bankrupt" the US industry by making it unprofitable to drill oil, Sankey explained. It's a tactic Riyadh used in 2014 and 2020 to regain control over oil prices.

And right now, the set-up is similar to both earlier episodes, the market veteran said. There's a lack of support from the rest of OPEC as countries like the UAE keep producing more oil while Iran is eating into Saudi's share of Chinese crude oil imports. And then there's weakening demand, like what happened during Covid.

"In all three instances you've had the biggest problem, arguably, which is that the US is just making highs and new highs and even further highs in terms of its own production," Sankey said.

US crude production has exploded this year and recently hit a record high of 13.2 million barrels a day, according to the Energy Information Administration.

Meanwhile, global energy markets have become skeptical that OPEC+ is serious about its latest pledges to curb production. After the cartel's meeting last week, when members vowed to extend cuts, oil prices fell.

Its weakening hold over oil markets was on display again this week. On Monday, the Saudi energy minister told Bloomberg TV that production cuts could go past the first quarter. On Tuesday, the Kremlin also talked tough. But oil prices dropped further.

Sankey declined to comment on whether he has heard about plans to increase production from Saudi officials. But the time to act may come soon.

"I think what will happen is they'll wait through winter to see what's going on and maintain, as they've said, into Q1, their cuts," he said. "And then if things start to weaken from there, they're going to have to decide what they're going to do."