OPEC Deal Indicates Saudi Arabia Is Abandoning Market Share Strategy

Last week’s OPEC production cut deal came as quite a surprise to the oil market, sending oil and energy stock prices soaring. While the modest cut in itself won’t do much to reduce the global supply of oil in the near-term, Reuters analyst John Kemp believes the deal is a sign Saudi Arabia is giving up on its strategy to preserve market share at all cost.

According to Kemp, the strategy of flooding the market with crude oil and driving down crude prices to eliminate weaker competition simply wasn’t working.

“Lower prices were expected to curb production by other producers with higher costs while improving the kingdom’s long-term position,” Kemp explains.

However, while shale production in the United States has been falling since early 2015, it has been more than offset by increasing output from OPEC members.

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Prior to last week’s special OPEC meeting, Saudi Arabia had been adamant it wouldn't agree to a production cut or freeze unless all OPEC countries and major non-OPEC producers participated. However, the new OPEC deal allows limited flexibility for Iran, Libya and Nigeria, which have all endured production disruptions.

Saudi Arabia now says it's comfortable with other OPEC members, including rival Iran, producing “at maximum levels that make sense.”

While global crude oil production remains near an all-time high, Saudi Arabia’s shift in strategy could be the first sign that the kingdom may once again be prioritizing higher oil prices and margins over market share.

Higher oil prices would be great news for long-term oil and energy investors. In the three days since the OPEC deal was announced, the United States Oil Fund LP (ETF) USO is up 7.6 percent.