History doesn’t repeat itself, but it often rhymes — take Saudi Arabia pushing OPEC to boost production, seemingly to humble cartel cheaters.
If it sounds familiar, it’s just coincidence. I’m not talking about last week, but rather 1997, when an OPEC meeting in the Indonesian capital of Jakarta hiked output just as the Asian financial crisis was gaining momentum (and the week Indonesia’s rupiah cratered). Few anticipated how ugly the combination of extra production and slowing economies would be. A year later, oil prices had plunged below $10 a barrel, and the policy mistake lives forever in OPEC’s memory as the “Ghost of Jakarta.”
Today, we are only sowing the seeds of a global economic disruption. But there are many parallels, including the fact that the oil market was weaker than many wanted to believe. If history is any guide, we are far from the oil market’s bottom.
The situation is fluid and much depends on the next steps taken by the White House and the OPEC+ alliance. Still, we can draw a few tentative conclusions.
1) So far, both the White House and, crucially, Saudi Arabia appear to be happy with a more than 10% plunge in crude prices since Donald Trump announced the tariffs. So don’t bet either will step in. Trump needs lower oil prices to offset the inflationary impact of the trade war. And make no mistake, the will and intent of the Saudis last week was to push oil prices lower. Period. That’s why they scheduled an impromptu meeting to announce the production hike hours before Trump launched his trade war, knowing it would maximize the bearish message. Whether the Saudis wanted to teach a lesson to OPEC+ cheaters like Kazakhstan, Iraq and the United Arab Emirates, or they had Trump in mind is unclear. Based on conversations with OPEC+ officials, I believe both factors played a role.
2) It would be a mistake to read 2025 throughout the very same lens of the last oil price war, fought in 2020 between Saudi Arabia and Russia. That price war, combined with the Covid-19 pandemic, sent oil prices below zero. For now, Riyadh isn’t replicating the same bullying tactics it deployed then. If in 2020 the kingdom launched the oil equivalent of a nuclear first strike, this time the military analogy would look more like a commando raid1.
And yet, the 2020-style price war makes more sense than what Riyadh is so far doing. The Saudi intention back then was to create as much financial pain as possible in the shortest possible time to get everyone around the negotiating table — quickly. The Saudis got what they wanted: the war lasted 35 days. This time, they risk the opposite. The financial pain of currently low prices is real, but not acute enough to force OPEC+ cheaters to negotiate. The opposite is true: those already cheating would be tempted to double down, pumping even more to offset some of the lost revenue.
3) Oil demand forecasts are way too high at an annual growth of more than 1 million barrels a day for 2025. My guess is that they will be cut by between a third and a half. History is a guide: In 1998, after the outbreak of the Asian crisis, oil demand grew by just 400,000 barrels a day, less than half the pre-crisis run rate. The crisis affected several fast-growing economies that are today the very same targeted with the highest tariffs (think Thailand, Philippines, Vietnam, Malaysia, Indonesia, China). Those nations are important because they are the engine of global oil demand growth, so an economic slowdown there has an outsize impact on petroleum demand.
4) With Saudi Arabia pumping more and global consumption growth weakening, supply-and-demand will need to rebalance the hard way via a slowdown in non-OPEC+ output growth. But that’s a process measured in quarters, rather than weeks or months. Some of the 2025 and 2026 growth is already baked in: Brazilian, Guyanese and Norwegian new oilfields would come on stream no matter what. So will new developments in the Gulf of Mexico.
Most of the rebalancing will fall on US shale companies. It’s been less than a week since the crash started, but my industry soundings indicate that not only are most shale companies already planning spending cuts, but a handful were warned over the weekend by their lenders that they need to reduce drilling immediately to avoid breaching loan covenants.
When the US Federal Reserve Bank of Dallas asked last month US shale companies what West Texas Intermediate oil price they needed to “profitably drill a new well,” the average response was $65 a barrel. On Monday, WTI for immediate delivery fell to just under $60 a barrel, and the 2026 average price, key for shale companies’ hedging, plunged to $58 a barrel. The impact of low prices on shale growth will probably be felt from June-August onwards. That’s quick compared to the two years that it took the non-OPEC supply growth to react to the 1997 crisis. But still, it leaves several months of unbridgeable supply and demand imbalance that require lower prices.
5) Finally, don’t forget psychology. The institutional memory of oil trading desks is firmly anchored in two oil price wars that brought ultra-low prices: The one the Saudis launched in late 2014 against the US shale industry, and the one in 2020 pitting the Saudis against the Russians. The first saw WTI dropping to less than $30 a barrel; the second saw it plunging to an all-time low of minus $40 a barrel. Unsurprisingly, everyone is today trying to hedge downside risk via put options, whose trading volume has exploded. With that historical background in mind, I don’t think many will try to catch a falling knife.
In 2020, the Saudis boosted output by nearly 2 million barrels a day; this time, they are increasing by less than 200,000 barrels a day. 1 View in article
