What the Edmond model says about Saudi Arabia’s play for market share
- OPEC’s move to speed up planned production hikes in the face of US tariffs and economic headwinds has surprised many oil-market participants.Analysts interpret it as a bid to punish free-riders and heed Donald Trump’s demands for low oil prices.
- Mean-field game (MFG) theory, a branch of game theoryfounded by Fields-medal laureate Pierre-Louis Lions and Kayrros co-founder Jean-Michel Lasry, suggests otherwise.
- Back in 2020, our MFG model of the oil market, dubbed Edmond, foresaw negative oil prices when few saw them coming.
- Since late-2024, the risk of a price “cliff” — when Saudi Arabia leads OPEC in counter-intuitive steps to push the oil price over the edge and regain market share – has been flashing red.
- A “cliff” typically occurs when producers can amplify an exogenous negative price shock. US ”Liberation day” initially looked like the perfect trigger but quickly fizzled.
- The effect of the “cliff” is typically amplified by high crude inventory levels, which has been the case with large builds in China and more storage capacity being built in the country.
- While oil prices have fallen, the market is still looking for a bigger trigger. It’s just a matter of time before it finds one, Edmond suggests.
- Bearish US policy signals did not come in a vacuum.After edging down in late 2024-early 2025, global crude oil stocks have bounced back with a vengeance, surging by roughly 2 mb/d on average from late February to the end of May, signalling mounting oversupply.
- Defying expectations of looming peak domestic demand, China has massively increased its crude storage capacity and has been leading the global stock build, much as it did during Covid-19. Overall Chinese crude onshore, above-ground stocks built by about 800 kb/d over the same period of 2025, and 1 mb/d between February 10 and May 21. Stocks have since continued to rise, hitting an all-time high on June 9, and substantially exceeding previous 2020 and 2023 records (hit at the peak of the Covid lockdowns).
- Also as in previous periods of building, Shandong province, home to the so-called teapot refineries, has been leading the national trend, reaching its own record high levels. Yet its share of the overall Chinese builds is lower than before. Stocks in South and East China also shot up.
- Likewise, the latest Chinese builds weren’t limited to teapots. State-owned enterprises (SOEs) also posted dramatic gains. CNOOC’s brand new Dongying terminal, which appears earmarked for strategic stocks, dominated recent builds in Shandong.
- Edmond is the first oil market model to factor in crude oil inventories, thanks to comprehensive crude stock data available since the launch of Kayrros Crude Oil Intelligence in 2016.
- The model shows how OPEC revenue optimization hinges on conflicting price and market-share goals. Hence the market’s cycling between gradual price increases, when high-cost marginal producers are incentivized to take market share from OPEC, and steep selloffs, when marginal producers are flushed out of the market and OPEC regains market share.
- For several months, Edmond had shown the market was itching for an exogenous shock that would cause a “cliff” formation.Trump’s “Liberation day” had all the hallmarks of such a trigger. Sure enough, OPEC responded by hiking supply.
- “Liberation day” lasted just a day, though, and the market is still looking for an opportunity to take prices much lower.
In the news
- EIA forecasts a drop in US crude oil production in 2026 (FT)
- OPEC+ production hikes increase risk of oil market imbalance in H2 2025 (Bloomberg)
- Crude calendar spread options open interest spikes (Bloomberg)
- Read our Op-Ed in Barron’s on the latest OPEC supply hike and the Edmond model.