By Antoine Halff, Jean-Michel Lasry, Pierre-Louis Lions, and Antoine Rostand

About the authors: Antoine Halff is chief analyst of Kayrros, a firm that uses satellite data and AI to monitor oil activity. Jean-Michael Lasry and Pierre-Louis Lions are mathematicians who invented the mean fields branch of game theory. Antoine Rostand is president of Kayrros.

For the second time in five years, Saudi Arabia, in an apparent act of self-harm, is flooding a weakening, oversupplied market with oil.

Brent prices sank to a four-year low on Monday after Riyadh and its OPEC+ partners announced their second monthly supply hike in a row. The rout extended an earlier selloff triggered by fears that the U.S. trade war would send the world economy -- and oil demand -- into a tailspin.

The decision to increase supply seems counterintuitive. Saudi Arabia's budget depends on oil revenue, and it is spending heavily to diversify its economy and build a visionary new city, NEOM. The Saudis need a certain price level to balance their budget, known as the fiscal break-even. Current market prices are well below that level.

It would be tempting to decry this decision as an ill-timed strategic blunder, a misreading of the market, perhaps an attempt to curry favor with President Donald Trump and heed his calls for cheap oil.

Nothing could be farther from the truth.

Markets should brace not for stability or a rally, but for another sharp downturn -- a Saudi-driven price dip catalyzed by today's U.S.-driven economic turmoil. Policymakers and investors must rethink assumptions about Saudi fiscal limits and the unity of OPEC+, which includes Russia and other producers as well as the original cartel members. Saudi Arabia has the financial buffers -- and patience -- to withstand a controlled price offensive.

The decision to increase supply seems counterintuitive. Saudi Arabia's budget depends on oil revenue, and it is spending heavily to diversify its economy and build a visionary new city, NEOM. The Saudis need oil at $90 a barrel or higher to balance their budget. Brent crude is trading in the low $60s, down 30% from its 52-week high near $87 in July.

For oil market watchers, the events of recent days are déjà vu. In March 2020, Saudi Arabia launched an oil price war in the midst of a pandemic. With economic demand already collapsing, Riyadh's decision to increase supply sent the price of West Texas Intermediate negative. Analysts scrambled to explain the historic collapse.

We saw it coming. Writing elsewhere, we predicted the risk of a catastrophic oil-market breakdown. Thanks to real-time satellite monitoring of oil inventories, we could see that the world was running out of space to store excess crude that was rendered unwanted by the global Covid-19 lockdowns. We warned at the time of "the catastrophic collapse to zero or negative prices" if coordinated production cuts failed to bring the system under control.

The basis of our call was the Edmond model. It is built on game-theoretic principles and captures the deep strategic dynamics of oil markets. It showed how the dominant oil producers had facilitated the oil price collapse and stood to benefit from that collapse in the long run.

Edmond's core insight is that Saudi Arabia and its main OPEC partners form a rare, durable monopoly. OPEC can manipulate prices because its members are able to produce at extremely low cost and face inelastic demand -- there is only so much oil buyers can do to reduce their consumption. But the cartel faces a trade-off: high prices maximize short-term profits but attract competitors; low prices squeeze rivals that have higher production costs but reduce per-barrel revenue.

Historically, OPEC has aimed to stabilize market share around 40-45%, adjusting production gradually. However, gradual moves are often undermined by arbitragers who buy and store cheap oil, or sell when prices rise, blunting OPEC's efforts. Instead, prices swing more violently: multiyear periods of high are followed by sudden, steep crashes. The price collapses of 1997, 2008, 2014, and 2020 reflect this pattern. Crucially, such transitions often occur when negative demand shocks are amplified by counterintuitive, countercyclical production hikes by the "dominant monopoly." That dynamic was apparent in the 1997 Asian financial crisis, the subprime market crash of 2008, and the Covid-19 pandemic of 2020. It also resembles today's turbulence sparked by U.S. policies and unprecedented trade tensions.

Recent reports have shown Riyadh signaling that it cannot only tolerate lower oil prices, but might actively want them. Frustrated by some of the smaller OPEC+ members flouting quotas and with rising U.S. crude supply, Saudi Arabia looks ready to boost output, sacrificing near-term revenue to reassert control. In 2014, Riyadh flooded the market to pressure U.S. shale producers. In 2020, the masterstroke was launching a price war, with later cuts (including U.S. participation) emerging as the resolution. Today, Riyadh seems prepared once again to act decisively.

The Edmond model explains why such moves make sense. For a dominant low-cost player, temporary pain is a calculated investment to consolidate market share, punish free riders, and deter future rivals.

In 2020, Covid-19 offered a rare opportunity to engineer the mother of all oil price collapses, and deter higher-cost competitors for a while. Negative oil prices worked wonders. They turned Trump, from a lifelong OPEC critic into a cheerleader. U.S. oil companies went from free riders into partners in the production cuts. The selloff slashed non-OPEC investment, not least in the Permian -- the stretch of Texas and New Mexico that is the world's most prolific oil region -- and other major U.S. shale plays. Western oil majors have dramatically underinvested since the pandemic, increasing upstream capital expenditures by only 10% since 2017 levels, well below global gross domestic product growth. Exploration spending has halved, constrained by investor pressures and climate concerns.

Yet, despite sharply curtailed levels of investment, U.S. production managed to recover fairly quickly, as producers learned to become more efficient and get more oil out of the ground for their money.

Today, U.S. policies are giving OPEC another unexpected chance to push oil prices down in a big way and undermine the shale oil industry. This time, the impetus isn't a pandemic but the turmoil Trump has unleashed on the global economy.

While the prospect of taking on U.S. companies might have given OPEC producers some pause in the recent past, such concerns have now been alleviated. By demanding loudly that OPEC crank up supply so he can fulfill his campaign promise of cheaper oil, Trump has effectively given it a green light to crash the market.

Saudi Arabia may be tempted to oblige. By industry estimates, sustained declines in oil prices could easily wipe one million barrels a day or more of U.S. crude production off the market for an extended period.

The lesson is clear. The oil market remains a game shaped not by impersonal market forces but by deliberate, calculated moves from Riyadh. Understanding the patterns behind these moves is key. In this next chapter of the oil saga, the world should be ready -- not for surprises, but for strategy.

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May 08, 2025 14:47 ET (18:47 GMT)

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