Haitham al-Ghais, secretary-general of Organization of Petroleum Exporting Countries (OPEC), during … More
Saudi Arabia is again making news in the oil markets. In a move reminiscent of the disastrous price war of 2015-2016 (see OPEC’s Trillion Dollar Miscalculation), the kingdom has decided to boost oil production in a market that is already adequately supplied. The goal is to reclaim lost market share from non-OPEC producers and send a clear message to fellow OPEC members who haven’t been sticking to the script.
The increase will add 411,000 barrels per day (bpd) to global supply in June, and marks the third monthly hike in a row. That’s on top of the 487,000 bpd added in April and May, for a total second-quarter boost of 960,000 bpd. Reuters reports this amounts to reversing about 44% of the 2.2 million bpd in voluntary cuts that were introduced when demand cratered during the COVID-19 pandemic.
Jorge Leon of Rystad Energy told Bloomberg, “OPEC+ has just thrown a bombshell to the oil market. With this move, Saudi Arabia is seeking to punish lack of compliance and also ingratiate itself with President Trump. the market at a time when demand growth is tepid and global inventories are still relatively high, Saudi Arabia is betting that it can force higher-cost producers, especially in the U.S., to back off.
A Familiar Squeeze for U.S. Shale
The last time Saudi Arabia tried this, the fallout was severe. U.S. shale companies—flush with capital and optimism—were pushed into a financial meat grinder when oil prices plunged. Dozens of firms filed for bankruptcy, investors were burned, and the U.S. rig count cratered.
Could it happen again?
With West Texas Intermediate (WTI) now hovering below $60 a barrel, that extra supply couldn’t come at a worse time for many U.S. producers. While shale operators have become more efficient and financially disciplined since the last downturn, many are still skating close to breakeven—especially those drilling outside the sweet spots of the Permian Basin.
Breakeven Realities: The Line Between Profit and Pain
Breakeven prices vary, but they remain the single most important metric for understanding who’s safe—and who’s skating on thin ice:
- Permian Basin: New wells generally break even around $62 per barrel. Once operational, however, ongoing costs fall dramatically, with some wells profitable even at $38.
- Delaware Basin: Breakeven sits closer to $56 per barrel.
- Midland Basin and Eagle Ford: These regions face higher break-even prices, around $66 per barrel on average.
A combination of inflation, supply chain issues, and tariffs has driven costs higher across the board. Steel and sand cost more, and those cost pressures are eroding margins.
What This Means for Investors
This brewing price war isn’t just a geopolitical chess match—it has direct implications for portfolios. Here are four key takeaways:
1. Margin Strength Matters
Producers operating in the lowest-cost regions are best positioned to ride out the storm. Investors should focus on companies with low breakevens, strong balance sheets, and disciplined capital spending.
2. Production Will Respond
As prices dip below breakeven, drilling slows. That reduction in U.S. supply could help stabilize prices over time, but the near-term pain will be real—especially for smaller, less efficient operators.
3. Services Sector Could Suffer
When E&Ps pull back, oilfield services feel it first. Companies like Halliburton and Schlumberger rely heavily on shale activity. If rig counts fall, so will revenues. That said, select service providers with exposure to the Permian’s core may still find opportunities.
4. Hedging Is a Lifeline
Some producers have locked in prices through hedging, insulating themselves—at least temporarily—from market volatility. Investors should keep a close eye on hedging strategies to understand which companies are less likely to be impacted by a prolonged price downturn.
A Balancing Act in a Volatile Market
Saudi Arabia’s gamble could put downward pressure on global prices in the short term—but it may also sow the seeds for another rebalancing. Lower prices will force marginal players to the sidelines, eventually tightening supply. But for now, the pressure is squarely on U.S. producers to either endure another round of low prices—or scale back once again.
For investors, the message is clear: pay attention to break even prices, watch for signs of capitulation in high-cost basins, and look for companies that can survive—and even thrive—at $60 oil or less.
