Risky Business: Saudi Arabia’s Oil Price Hike and Market Reaction

As the world’s leading energy exporter, Saudi Arabia’s decision to raise the price of oil for its Asian customers, namely China and India, is a significant development. The surprise move, announced ahead of the much-anticipated OPEC+ meeting on June 2, saw Saudi Aramco increase the price of Arab Light crude for Asia customers by over 300 percent—from $0.90 to $2.90 per barrel above the Oman-Dubai benchmark. Saudi officials cited strengthening oil benchmarks, particularly the price of Dubai-Oman crude, to justify the price hike. However, a more likely underlying motive would be Saudi Arabia’s desire to maintain high oil prices in the face of the ongoing war on Gaza and the potential for further destabilization across the Middle East, which pose a serious threat to global oil markets and the country’s economy—although the attempt to secure its own economic well-being will certainly buy it no friends to the east.

Local Stability Shapes Oil Markets

The impact of the war on Gaza on global oil markets has perhaps been less significant than its wider political ramifications for the region. Since the outbreak of the conflict, the average price of the OPEC basket dropped by $6 per barrel, or about seven percent. However, these trends have prompted global and regional powers like the United States, Turkey, Qatar, and Saudi Arabia to intervene and stabilize prices.  Indeed, the continuation of tensions in the region could lead to a more pronounced slide in oil prices, which would impact the finances of several Gulf states. In this vein, Saudi Arabia’s increase in prices is probably intended to guarantee that oil prices will remain stable to avoid a domestic economic crisis.

Saudi Arabia’s decision had an immediate impact on the outlook of its top customer, China. The unexpected price hike led China to reduce its imports of Saudi oil in June compared to May 2024. A significant shift in Chinese import activity could potentially disrupt global oil trade dynamics, as China turns instead to Russia to meet its energy needs. Indeed, Beijing is expected to increase its oil imports from Russia, China’s top supplier for many years, by 2.1 million barrels per day (bpd) compared with the January-July period in 2023. China’s growing hydrocarbon links to the Kremlin fit a clear trend. In 2023, Beijing imported 107 million tons of crude oil from Moscow—a 24 percent increase from 2022. Moreover, in 2023, China imported eight million tons of liquefied natural gas (LNG) from Russia, a 77 percent increase from 2021. These purchases helped to diversify China’s supplies of oil and gas and strengthen its shaky post-COVID economic recovery; they also extended an economic lifeline to Russia, which obtains nearly half of its annual revenue from the hydrocarbon trade, during its period of unprecedented international isolation following the invasion of Ukraine. The two nations’ mutual reliance—China on Russian oil, and Russia on badly-needed Chinese funds—will likely increase as the war drags on.

Domestic Demand, International Isolation

Though many experts have linked Saudi Arabia’s oil price increase to geopolitical turmoil, another crucial reason behind this decision lies closer to home. Saudi Arabia’s leadership likely hopes to stock the country with adequate volumes of crude to burn for electricity in the coming months. In this vein, the Saudi authorities are hoping to maintain the Brent crude oil price between $102 and $104 per barrel—an ideal range to prevent budget shortages. Therefore, during the upcoming OPEC+ meeting in June, one can expect the Saudi authorities to pressure all parties to cut oil production until global oil prices rise to a level more friendly to their budget. In spite of these aggressive tactics, Riyadh may not be able to raise oil prices singlehandedly. Even if it cuts production and exports, Russia will continue to meet Chinese demand, while other Asian customers will find alternative suppliers—the United States, Brazil, or even others in the Middle East—willing to sell at a lower price.

Observers remain divided on the potential implications of Saudi Arabia’s price hike. Some predict that it could lead to a potential supply squeeze, particularly given the instability that has gripped the Middle East over the last six months. This is a significant concern, as it could disrupt global oil supplies, compounding the effects of the ongoing war in Ukraine. Analyst predictions suggest that the global demand for oil supply will increase during the summer period—leading some countries in OPEC+ to advocate for a production increase, rather than cuts. Riyadh is expected to resist such moves, but it is unclear how much leverage the Kingdom maintains over its partners in the cartel.

Unfortunately for Saudi policymakers, the Kingdom’s efforts to cut oil production coincide with several initiatives that require the buy-in of regional states. Riyadh is simultaneously encouraging a ceasefire in the Gaza Strip and attempting to deter the Yemen-based Houthi rebels’ attacks in the Red Sea to allow the safe export of oil. However, Israel’s ongoing operation in Rafah, as well as Tel Aviv’s commitment not to withdraw its forces until Hamas is fully eradicated and its equivocal answer to the recent ceasefire proposal promoted by U.S. President Biden, suggest that the conflict will not die down any time soon.

In short, by raising prices for its flagship crude destined for Asia, Saudi Arabia is demonstrating a certain degree of strategic foresight, padding its bottom line ahead of an unclear period in global hydrocarbon markets. However, the country is not all-powerful over the oil trade, and its customers are clearly not content to simply pay the higher price that Riyadh has imposed on them. It remains to be seen whether this gamble—on top of the country’s other risky initiatives in regional diplomacy—will pay off in the long run.

The original piece was published by Gulfif

Leave a Reply

Your email address will not be published. Required fields are marked *