By Irina Slav
- Some observers expressed hope that a trip by President Biden to Saudi Arabia could spark more production and bring prices down.
- In reality, there is no quick fix to the current oil problem and while new Saudi supply could halt a further spike in prices, they are set to remain elevated.
- There is plenty of resistance domestically to any thawing of relations with Saudi Arabia due to the murder of Khashoggi, making any trip a tough political decision.
When news broke last week that President Biden was planning a Middle East visit that would include Saudi Arabia, many an industry observer saw in this signs of “thawing” relations between Washington and Riyadh. They also saw the prospect of lower oil prices. It was, after all, to lower prices that Biden was planning this visit. Unfortunately, things are never that simple. While it is a nice thought that a single visit to Saudi Arabia could convince them to open the oil taps and send prices falling, the reality is that prices may not come down for a long time yet.
On Friday, Goldman Sachs’ head of energy analysis Damien Courvalin, speaking to CNBC, quashed hopes for a quick fix to the world’s—and the United States’—oil problem. The market is in a structural deficit that has been years in the making, Courvalin said, and while some additional Saudi barrels could prevent a further spike in the immediate term, they are not a sustainable solution to the problem.
The OPEC+ decision to add more barrels to its monthly production increase is another example of just how little power OPEC has over oil prices currently. Initially planned at a little over 400,000 bpd, OPEC+ last week agreed to boost this to almost 650,000 bpd. The decision drew praise from some observers, but others were quick to note that a pledge to do something is not at all the same as actually doing it. The Financial Times, for instance, this week cited Rapidan Energy Group as saying that OPEC+ would hardly achieve the full 648,000-bpd production increase in July and August. A more realistic figure, according to the consultancy, was 355,000 bpd.
Some OPEC members’ problems in producing as much oil as agreed under the original OPEC+ deal have been no secret. In April, such problems led to OPEC producing as much as 2.7 million bpd less than it was supposed to produce.
Yet this fact about OPEC production is not getting anywhere near as much attention as President Biden’s visit to Saudi Arabia, which has yet to be officially confirmed and scheduled. For now, there are just plans. And these plans are already being criticized.
The chair of the House intelligence committee, Adam Schiff, told CBS last weekend that if he were Biden, he wouldn’t go to Saudi Arabia, noting “I wouldn’t go. I wouldn’t shake his hand. This is someone who butchered an American resident, cut him up into pieces and in the most terrible and premeditated way.”
What this suggests is that the issues that put the U.S. and Saudi Arabia at odds, including Biden’s threat to turn the Kingdom into a pariah state because of the Khashoggi killing, are still alive and well, and an olive branch from Biden might not sit too well with some voters.
The question, of course, is whether these voters are more than those that are unhappy with the Biden administration’s energy policies that have pushed retail fuel prices to the highest in years—in some parts of the country to all-time highs.
“This trip to Israel and Saudi Arabia — when it comes — would be in the context of significant deliverables for the American people in the Middle East region,” said White House Press Secretary Karine Jean-Pierre last week, adding that “If he [the President] determines that it’s in the interest of the United States to engage with a foreign leader and that such an engagement can deliver results, then he’ll do so.”
This is not particularly specific as far as plans to bring oil prices lower go, but it does address potential concerns of the sort that Schiff voiced in his CBS interview. The problem is that, with a structural deficit on his hands, no amount of fence-mending with Saudi Arabia would help.
Global oil supply is tight and likely to remain so because of geopolitical factors, according to Goldman’s Courvalin. He noted the EU sanctions against Russia targeting its oil industry, Libya’s continued struggle to keep its production uninterrupted, and the fact that Iranian negotiations are, once again, “going nowhere.”
What all this means, basically, is that whatever the U.S. president or any other world leader does, oil prices are most likely to remain elevated. In fact, they might still go higher. The latest to address a warning to those in charge of the economy was Trafigura’s Jeremy Weir.
The commodity trader’s chief executive said at an FT event this week that “We have got a critical situation. I really think we have a problem for the next six months . . . once it [the oil price] gets to these parabolic states, markets can move and they can spike quite a lot.”
OPEC+’s decision to boost production by more than the originally agreed was taken by some Western analysts as a sign of Saudi Arabia doing “an about-face”, as Rapidan Energy Group’s Bob McNally put it to the FT.
Interestingly, the Kingdom is not saying much about the hypothetical Biden visit that the White House is planning. The latest from the Saudi side was a lawmaker’s comment that Biden’s visit has been postponed until July in order for Washington to meet all Saudi demands first. One cannot help but wonder how far Washington is willing to go to lower oil prices, even if there are no guarantees that it would succeed.
By Irina Slav for Oilprice.com