The literal meaning implies that the Hittites were God-worshippers and knew Abraham was protected by God.
History has of course decided that Abraham actually was a prince of God, but the Hebrew words of the text actually mean “a mighty prince”.
Biblical Hebrew often uses this device. Nimrod is a mighty hunter “before the Lord” (Gen. 10:9). The plain of Jordan was “as the garden of the Lord” (Gen. 13:10). Bashan was “a mountain of God” (Psalm 68:16). There were “cedars of God” (Psalm 80:11). Nineveh was a great city “unto the Lord” (Jonah 3:3).
In these verses the reference to God does not denote a spiritual dimension but suggests extreme greatness – i.e. greatness even in cosmic terms.
In our verse, as Moses Mendelssohn points out, the Hittites are rather politely correcting Abraham’s description of himself as ger v’toshav, “a stranger and settler” – a nobody (verse 4).
Their response is, as it were, “You say you are a nobody, but we regard you as a mighty prince”.
Whether they really meant it or used the phrase as a negotiating ploy to get more money for the cave of Machpelah is a matter of debate.