Why did Saudi Arabia raise prices to the Asia market while increasing OPEC+ production quotas?
Earlier this week, I published an article titled “What does the OPEC+ increase of 411,000 mean to the United States?” I was asked about Saudi Arabia's increase in the Asia market and how it would impact the United States. Those two points are broken out into sections below.
They seem to be trying to make too many market adjustments by increasing production while raising prices for a specific market.
Saudi Arabia is raising prices to Asia
Saudi Arabia raised prices for its crude oil to the Asian market in June 2025, despite OPEC+ increasing production quotas, due to a combination of strategic and market-driven factors:
Expectation of Strong Asian Demand: Saudi Arabia anticipated robust oil demand in Asia, particularly from major importers like China. The price hike for Arab Light crude by $0.20 per barrel to a $1.40 premium over the Oman/Dubai benchmark reflected confidence in sustained or growing demand, even as global supply increased. This move suggests Saudi Arabia aimed to capitalize on refining value adjustments and market fundamentals in the region.
OPEC+ Strategy to Enforce Quota Compliance: The OPEC+ decision to raise output by 411,000 barrels per day (bpd) in June, nearly triple the expected volume, was partly driven by Saudi Arabia’s frustration with members like Kazakhstan and Iraq, who consistently overproduced their quotas. By increasing supply and raising prices, Saudi Arabia may have been signaling a shift toward prioritizing market share and disciplining quota violators, potentially at the cost of lower oil prices. This aligns with speculation that Riyadh is willing to tolerate lower prices to pressure non-compliant members.
Geopolitical and Trade Considerations: The production hike and price adjustment coincided with U.S. President Donald Trump’s tariff announcements and his upcoming visit to Saudi Arabia in May 2025. Saudi Arabia’s actions could be a strategic move to align with Trump’s calls for lower oil prices to curb U.S. gasoline costs, while maintaining revenue through higher Asian prices. This also reflects a possible shift from defending high oil prices (needed for Saudi Arabia’s $90+ per barrel budget) to securing market share amid competition from non-OPEC+ producers like the U.S. and Guyana.
Market Share and Competition: Historically, Saudi Arabia has adjusted prices to maintain competitiveness in Asia, its largest market. The price increase, despite higher OPEC+ output, could be a preemptive move to counter rising supply from other producers (e.g., Russia’s return to Asian markets post-sanctions) and secure long-term contracts with Asian refiners. This mirrors past strategies where Saudi Arabia balanced price and volume to retain market dominance.
However, this strategy carries risks. The increased OPEC+ supply contributed to a sharp decline in oil prices, with Brent crude dropping to around $61.56 by early May 2025, well below Saudi Arabia’s fiscal breakeven point. Some analysts suggest this reflects a deliberate shift away from price defense toward punishing overproducers or aligning with broader geopolitical goals, though it’s not yet a full-blown price war.
In summary, Saudi Arabia raised Asian prices to leverage expected demand strength and refining margins while using increased OPEC+ production to discipline quota violators and navigate geopolitical dynamics. The move reflects a complex balancing act between revenue needs, market share, and alliance management.
The Saudi-led decision to raise crude oil prices for Asia while increasing OPEC+ production quotas in June 2025 has several implications for the U.S. oil market:
Downward Pressure on Oil Prices: The OPEC+ production increase of 411,000 barrels per day (bpd) has already contributed to a global supply glut, pushing Brent crude prices down to around $61.56 per barrel and West Texas Intermediate (WTI) to similar levels by early May 2025. Lower global oil prices reduce revenues for U.S. shale producers, who often require higher prices (around $50-$70 per barrel) to remain profitable. This could slow drilling activity and investment in U.S. oilfields, particularly in high-cost regions like the Permian Basin.
Increased Competition for U.S. Exports: Saudi Arabia’s price hike for Asia, its largest market, contrasts with stable or slightly reduced prices for the U.S. market (e.g., Arab Light priced at a $5.85 premium over the Argus Sour Crude Index). This pricing strategy may make Saudi crude less competitive in Asia, potentially diverting more Saudi and OPEC+ oil to the U.S. Gulf Coast, a key refining hub. Increased imports of cheaper foreign crude could squeeze U.S. producers’ market share, especially for light sweet crude grades similar to those produced in the U.S.
Geopolitical and Trade Dynamics: The OPEC+ move aligns with U.S. President Donald Trump’s push for lower oil prices to reduce domestic gasoline costs, especially ahead of his May 2025 visit to Saudi Arabia. Lower crude prices could translate to cheaper U.S. pump prices (currently around $3.00-$3.50 per gallon nationally), boosting consumer spending but pressuring U.S. oil companies’ margins. However, Trump’s proposed tariffs on imports (10%-20% across the board, 60% on Chinese goods) could disrupt global oil trade flows, potentially offsetting Saudi supply increases by raising costs for refined products or equipment, indirectly affecting U.S. refiners and producers.
Refining Sector Benefits: U.S. refiners, particularly those on the Gulf Coast processing medium and heavy sour crudes (similar to Saudi grades), may benefit from lower input costs due to cheaper imported oil. This could improve refining margins, especially for complex refineries capable of handling Saudi Arabia’s heavier grades. However, if global oversupply persists, refined product prices (e.g., gasoline, diesel) could also fall, limiting profitability gains.
Long-Term U.S. Production Risks: Sustained low oil prices below $60 per barrel could force smaller U.S. shale producers to cut output or delay new projects, as seen in past price slumps (e.g., 2020). Larger firms like ExxonMobil and Chevron, with diversified portfolios, are better positioned to weather the downturn, but a prolonged price war or oversupply could reduce U.S. production growth, projected at 800,000 bpd for 2025 by the EIA. This might also dampen job creation in oil-dependent states like Texas and North Dakota.
Market Share Dynamics: Saudi Arabia’s strategy to discipline OPEC+ overproducers and maintain Asian market share could signal a shift toward tolerating lower prices to squeeze high-cost producers, including U.S. shale. While U.S. production is resilient due to technological efficiencies, a sustained low-price environment could cede market share to OPEC+ in global markets, particularly if non-OPEC supply growth (e.g., from Guyana or Brazil) outpaces U.S. output.
In summary, the U.S. oil market faces lower crude prices, increased import competition, and potential production slowdowns due to Saudi Arabia’s pricing and OPEC+ output decisions. While refiners and consumers may see short-term benefits, U.S. producers face margin pressures and market share risks, with outcomes hinging on how long low prices persist and how Trump’s trade policies evolve.
The Bottom Line
This week, we are seeing the announcements from ExxonMobil and other major public U.S. companies that they are staying the course for their Cap Ex budgets and drilling and may delay their fracking and close some wells. This would delay the more expensive oilfield service from drilling and completing the wells until they have higher prices. DUCs (Drilled, Uncompleted Wells)
This brings up a huge point about sound economics. If the well economics don’t look good at $65 oil, they will not be that good at $60 oil, and the location may not be good. When I ask for well economics from my team, we budget for below $50 as we know that we can hunker down and focus on our programs. And at $70 oil, we make a lot more money for our investors and drilling projects.
This is the same thing Saudi Arabia is doing: providing more revenues where the market will support the higher prices, and trying to become relevant in the oil market leadership. They have a tough job keeping Russia, Iran, and Kazakhstan in check on their production quotas.
Saudi Arabia is playing the long game, but I would rather play in the capital ownership of the United States oil and gas game rather than the oil company owned by the kingdom, and all royalties go to the royalty.
And that is the Crude Truth.
Please let me know your thoughts. Where do you think oil and gas prices will go?
That is a cool observation - so, how soon do you see going back up? By the end of 2025?