(Public) The Narrative That The Saudis Will Launch An Oil Price War Should Go Right Out Of The Window After This OPEC+ Meeting

Editor’s Note: This article was first published to HFI Research subscribers on Dec 5th. We have published the original article below for public readers.

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When it comes to oil market analysis, the worst bear argument I've seen thus far is that Saudi Arabia will launch another oil price war because of OPEC+ disunity. These bear arguments center around the idea that the "excess" spare capacity and the persistent production cut are unsustainable and will eventually force the Saudis to increase production to regain market share.

With the conclusion of the OPEC+ meeting today, those arguments are as good as dead.

Source: Amena Bakr

This chart created by Amena Bakr best illustrates the different layers of the production cut.

At the bottom layer, the "collective group cut" layer, is the production cut that's not really a production cut. The ~2 million b/d here uses an arbitrarily large production cap figure for countries like Saud and UAE. For many of the other countries in OPEC+, the ceiling was put in place because of the inability to produce to that ceiling (natural declines). By virtue of the higher ceiling, it looks like the other producers are cutting. The only countries reducing production per the collective group cut are Saudi, UAE, Kuwait, Iraq, Russia, and Kazakhstan. Everyone else is just freeloading by underproducing due to the inability to increase production.

Now moving over to the voluntary production cuts. There are two layers to this. Amena's chart shows that the second layer of voluntary cuts, ~1.66 million b/d, has been extended to the end of 2026, while the first layer (the real production cut) has been extended to Q1 2025 with a gradual increase starting in April 2025.

The above table shows the gradual production increase from each of the 8 countries. Note that the production increase is expected to be phased in slowly into 2026.

The other important detail in this is that UAE, which was slated to have its production cap increase by ~300k b/d starting in 2025 has agreed to delay the increase by 3 months. And when it does get to start increasing production, the ~300k b/d is phased over 18 months instead of 9 months.

In my opinion, one can argue over whether or not these production cuts will be effective in pushing oil prices higher or not, but one can no longer make the argument that OPEC+ disunity exists. The risk of an oil price war has gone down significantly, so if you see anyone spew this nonsense, you know they are not changing their opinion based on the changes in facts.

How will this impact global oil supply & demand balances?

In my view, the new OPEC+ production policy meaningfully changes global oil market balances in 2025 to the bull side especially if Trump enforces sanctions on Iran.

Even if the voluntary production cut is curtailed at the end of Q1 2025, the slow increase (well into 2026) makes it very negligible on oil market balances.

In the table above, the global oil supply & demand balance assumes 1) lower Iranian production and 2) lower Venezuela production. If both materialize, 2025 oil market balances will flip to a deficit.

Now if Trump fails to reduce Iran and Venezuela's production, then 2025 oil market balances will be flat.

In essence, a lot of what happens in 2025 will be dependent on sanction enforcement. We believe Iran's production will decline from the ~3.5 million b/d we are seeing today. The US will likely force both China and India to comply with sanctions using tariff threats.

In the most bullish scenario where both Iran, Russia, and Venezuela get impacted, this is what we see:

Obviously, such a scenario would result in a US intervention and this will likely be in the form of Trump pressuring the Saudis to increase production. This scenario is a very low probability event, but it's a possibility of the trade war rhetoric is strong enough and if the Trump administration is serious enough in choking off sanctioned barrels.

Most Likely Scenario

In my opinion, this is the most likely scenario.

Iran's oil production will fall, but not as much as the previous drop (3.5 to 3.1 million b/d). Venezuela will show a decrease of ~200k b/d, while Russia will show a decrease of ~200k b/d (natural decline).

For Q1 2025, oil market balances should be neutral. And with the increase in voluntary production cut phased into 2026, the impact on balances will be negligible. I think oil market balances in 2025 are more likely to be skewed to the deficit rather than a surplus.

Conclusion

The most important takeaway from this article is that the tail risk event in oil (oil price war) is greatly reduced. OPEC+ disunity is a good headline grabber from media outlets desperate for attention, but it's far from reality. And with the production increase phased out into 2026, OPEC+ can return production without materially impacting balances.

With the market still pricing oil as if Q1 2025 balances are going to show massive builds, the lack of builds in Q1 should kickstart the catalyst for oil prices to rerate to inventory implied price levels (mid-to-high $70s for WTI).

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.