Much to the relief of central bankers and drivers alike, crude oil prices have eased in recent days. In tandem, chatter that benchmark West Texas Intermediate (WTI) was about to cross the US$100/bbl threshold appears to have been set aside for the time being. The risk of Iranian production being disrupted has fallen following Israel’s measured response to prior drone attacks. Nonetheless, crude oil prices are likely to remain volatile given uncertainty over the pace of incremental global oil demand, rising non-OPEC+/U.S. production, potential Russia/Middle East supply disruptions and, critically, OPEC+’s future production strategy. We suspect the latter is likely to garner more attention in the coming months with the cartel’s next Joint Ministerial Monitoring Committee (JMMC) meeting set for June 1, 2024.

OPEC+’s production cuts have been quite effective in keeping a floor under oil prices over the past year but intra-cartel relations remain tense, which is why a significant share of cuts are now voluntary. However, the longer cuts are kept in place, the more likely it is that certain members will continue to exceed their quotas, notably the UAE, and the overall cohesiveness of the cartel will be tested. The fact is that the unity of the cartel largely hinges on Saudi Arabia’s willingness to continue shouldering the heaviest load. Meanwhile, the Kingdom’s spending pressures continue to mount, which explains why the IMF’s latest estimate of Saudi Arabia’s fiscal breakeven crude oil price (i.e., the average price that balances the budget) climbed to US$96/bbl in 2024 (Table 1). One might notice that its breakeven price is projected to fall in 2025 but this really depends on whether production cuts are rolled back, which the IMF is anticipating. Keep in mind, these are not Riyadh’s actual price targets. Nevertheless, it does give us a good idea of the level of crude oil prices that is required to prevent the budget deficit from ballooning.

Equally vital, the IMF’s calculations also show that Saudi Arabia is not the only key cartel member that would prefer higher prices. Kuwait and Iraq also need crude oil prices to hover above $80 and $90, respectively, to prevent sharp deteriorations in their budget balances. The UAE budget can cope with much lower prices, with its fiscal breakeven oil price estimated at only $57. Together, Saudi Arabia, Iraq, Kuwait and the UAE account for 90% of the cartel’s total cuts. The IMF has not provided an estimate for Russia’s fiscal breakeven oil price, but it conservatively sits in the $90-to-$100 range.

Key Takeaway: Saudi Arabia is not the only key cartel member that needs elevated crude oil prices as Iraq and Kuwait are also facing increasing budgetary strains. Such developments should boost OPEC+ unity and extend the current production cut strategy for the rest of the year.

You might also be interested in