Saudi can manage either price or market share. Today, it’s losing control of both. Prices are falling and so is their market share. This unstable equilibrium is under appreciated by the market.

Saudi has no easy out. Either they maintain a $60+ price and see their market share continue to erode, or they increase production to reclaim market share, and see prices plummet. Either way, it’s lower revenue in the short term.

Long-term revenue maximization is more important. Saudi can keep propping up the market for the benefit of US (and other non-OPEC) producers, but they shouldn’t. Making the competition stronger at their expense is a terrible long-term strategy.

That leaves managing for market share, even if that means increasing production at today’s moderate prices. Doing so will crush the market for several years and cause real pain. But Saudi will be better off in the long term with competitors suffering now rather than prospering. A third price collapse in 10 years will send the signal that no investor, sovereign or private, should ever invest in long-lived production again. Capital providers will completely lose faith in this industry. Saudi needs that.

Another price collapse would convince investors that the upstream market is uninvestable for all but the very best assets. There would be less capital for new drilling in the next cyclical rally, fearful of what will seem like an inevitable future price plunge. The market will learn the lesson and severely discount the forward curve, making it hard for producers to hedge and lock in their economics.

Only then will the strongest producer, Saudi, benefit from both rising production and prices. Taking the market to <$40 again will be painful for them in the near-term, but they have the financial wherewithal to survive. Taking the near term hit to revenues will be painful, but I don’t think they have any choice.

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