Tensions are running high as OPEC leaders met recently for crucial talks. For decades the alliance, led by Saudi Arabia, controlled oil prices. But new pressures are threatening their grip.

America’s shale production has transformed the US into the top supplier. As OPEC’s cuts falter, global prices continue dropping in an uncertain economy.

Now Saudi Arabia faces a dilemma. Surging output beyond OPEC’s influence jeopardizes its authority. Analysts warn drastic steps may be needed to curb the kingdom’s declining sway.

Could Saudi Arabia’s response spark an all-out supply war with the U.S.? 

As OPEC unity frays under the growing shale threat, many ponder whether the alliance’s dominance has run its course. 

The world watches anxiously to see if Saudi Arabia will take the drastic step of kickstarting a supply battle that could upend energy markets for years to come. The stakes have never been higher as Saudi maneuvers to maintain its crown against the surging US shale revolution.

The tensions within OPEC are growing as the organization struggles to agree on production cuts to boost falling oil prices. Led by Saudi Arabia, OPEC and its allies, also known as OPEC+ met a few days ago to decide on cuts. But they had a hard time reaching a deal.

After delaying their meeting by a week to try and get everyone on the same page, OPEC+ members still couldn’t agree on coordinated cuts. Instead, seven countries including Saudi Arabia, the UAE, and Kuwait voluntarily cut a total of 2.2 million barrels per day for the first 3 months of 2023. While this showed some cooperation, not having a real agreement made people question how stable the group would be going forward.

Analyst Jorge Leon saw it as both a good and bad thing for Saudi Arabia. They got some countries to take on more of the cutting. But not having a consensus deal exposed cracks in OPEC+’s unity. This limited their power to balance the market since oil prices had dropped over 14% from highs in September.

Traders were hoping for a boost from OPEC cuts, but prices kept falling. US oil dropped more than 2% on the announcement day, and Brent crude dipped a bit too. Oil futures fell sharply the next day as well, disappointing those expecting stronger cooperation.

Analysts pointed to factors working against OPEC. The voluntary cuts only lasted 3 months, without the stability of a longer agreement. There were also worries OPEC+ unity might fall apart more. Plus, record output outside the group made it hard for OPEC to have impact.

Notably, US oil production hit an unprecedented high of around 13 million barrels per day compared to Saudi Arabia’s 9 million. With other strong non-OPEC output too, the market was overloaded and prices didn’t budge much from OPEC supply changes. Analyst Natasha Kaneva said meaningful cuts were getting harder to implement and sustain under current conditions.

The surge in non-OPEC supply put Saudi Arabia in a tough spot. Analyst John Kilduff said Riyadh was “fighting a losing battle” against rising US volumes that could cover growth on their own. With cuts doing little, the Saudis seemed to have a big problem.

Some experts argued Saudi Arabia’s only way to defend its market share and pricing power was through aggressive price competition. Analyst Paul Sankey stated they may have “no choice” but to flood the market and slash prices dramatically.

As the situation evolved, Paul Sankey said Saudi Arabia really had “a huge problem” dealing with growing non-OPEC output led by American shale. He told CNBC the kingdom essentially had “no other option” but to “just flush this thing out” – possibly meaning to boost supply a lot to global markets itself.

Sankey estimated Riyadh could rapidly raise production by a major 2.5 million barrels per day through existing infrastructure and resource capacity. Such a large volume increase would test all other suppliers. Recalling OPEC’s methods before, the analyst referred to Saudi Arabia’s previous move in 2014 cutting rates sharply to regain leadership – showing a willingness to accept short-term disadvantages for long-term influence.

Sankey thought history could repeat, given renewed importance for Riyadh to limit declines in its market share percentage from resilient highs in U.S. shale-driven supply. He saw American production as an even bigger “headache” for OPEC today than during the last period of adjustment, underscoring serious challenges to the existing system.

Sankey estimated they’d need to drive oil below $60 to undercut US producers, who were planning around prices near that level. Facing dissent and unrelenting outside production, the Saudis almost started an all-out “supply war” through desperate output increases earlier that week.

The challenge of ballooning non-OPEC supply, led by surging US volumes, put OPEC’s ability to balance the market in serious jeopardy going forward. Analysts closely watched for clues about their longer-term strategy after the first quarter cuts ended.

The Saudis had tough choices ahead. Continuing cuts alone clearly wasn’t fixing the problems, as rates kept falling. But flooding barrels also carried huge risks. With few good options, everyone waited to see Riyadh’s next move in the high-stakes game affecting energy markets worldwide.

If Saudi Arabia and Russia went back to producing 1.3 million more barrels a day in April like Goldman Sachs predicted, the bank thought Brent crude would average around $77 in 2024 but drop to $57 in 2025. This could cause some US shale activity to slow down later in 2024, cutting an estimated 170,000 barrels off growth plans. But the voluntary OPEC cuts needed to stay in place that year to keep prices around $80 like intended.

Global stockpiles were growing again contrary to forecasts as US production kept breaking records. This led to doubts about if countries would follow through on promised supply reductions. Saudi basically keeping its output the same and Russia adjusting other quotas meant real cuts were only around 700,000 barrels total from Iraq, UAE and a few others.

Analysts warn that without OPEC+ unity and compliance improving, the $80 price level faces downside risks. Since the cuts aren’t mandatory and spare outside capacity is rising, getting bigger coordinated reductions through teamwork seems less likely going forward. All signs point to OPEC continuing to struggle affecting prices just through agreed supply adjustments.

This leaves the US market fairly independent of what is happening between OPEC nations. As the top producer, America looks set to benefit from its strong shale no matter what was discussed internally in the group. The leadership crisis, decreased cooperation and rising volumes challenging Saudi Arabia mean it has lost good leverage over previous counterparts like the US.

Monitoring continues on how united countries can stay, their individual plans and global inventory levels – as these will ultimately decide where oil prices end up during this period of energy transition and general market uncertainty dominated more by US prowess than OPEC control. With influences outside growing tougher to manage, the days of the group alone firmly steering costs may already have passed.

In the days after the December OPEC+ meeting without an agreement, there is still uncertainty around the stability of the producing alliance and oil prices. Analysts watch Saudi Arabia closely as OPEC’s leader to see its next steps. Many think Riyadh may feel it needs to take strong independent action to protect its share of the market and pricing against increasing supply outside the group.

Saudi Arabia’s options seem limited given previous challenges. Voluntary cuts by some members add up to less than expected, doing little to reduce surplus oil or get prices back over $80 hoped for. Following through even on non-mandatory reductions also seemed iffy. Meanwhile, U.S. production kept breaking records over 13 million barrels daily.

If Saudi opted to increase output significantly, short-term oil prices would probably become unstable – perhaps falling below $60 or revisiting 2014 lows – applying tough financial pressures across all drillers. However, longer-term, control might shift back Saudi’s way once others scaled back activity.

Of course, starting an all-out supply response also carries large economic and political risks. A sustained period of lower prices could seriously damage ties within OPEC+, threatening the coalition’s cooperation. Conversely, prices rising too high from constrained supplies risks fueling inflation.

Either way, with its previous flexibility during downturns and proven determination when needed to advocate for market leadership, Saudi Arabia was potentially equipped to weather a period of adjustment better than most. Though disruptive, another supply adjustment therefore could not totally be ruled out if weighing regaining lost share from competitors against associated downsides.

Whether seeking price stabilization, market dominance or both, observers unanimously agreed the Saudis have hard choices ahead. Continuing output cuts alone clearly wasn’t fixing the challenges, as made evident by still declining rates. Yet aggressively flooding barrels carried enormous risks too.

With few good options visible, attention stayed focused on Riyadh in coming weeks for signs of its next measured decision in this high-stakes scenario. Its choice would profoundly influence not only issues within OPEC, but energy markets – and economies – worldwide for years ahead. While the productive renaissance in U.S. shale has certainly complicated OPEC’s role, Saudi oil remains essential to universal supply security. Its long-term strategy would thus be scrutinized industry-wide with notable attention.

As these dynamics play out with OPEC unity tested like never before, the credibility and longevity of the coalition’s ability to steer prices through coordination faces a defining moment. Whether the Kingdom retains its nimble strategy, and prevailing non-OPEC output ultimately flattens, may determine who holds supremacy – and the future stability of global energy trade.