There is nothing new about American presidents appealing to Saudi kings and crown princes for their help in balancing oil markets. Richard Nixon, George Bush senior and junior, Barack Obama and Donald Trump all at one time or another called for the Kingdom to adjust production. With recent poor political relations between the two countries, Joe Biden had hoped not to join this list, but the rise in average US petrol prices to more than $5 per gallon has made it unavoidable.
The latest meeting of OPEC+, the framework that groups OPEC with Russia and some other important oil exporters, decided on June 2 to cram three months of production increases into two. Instead of the planned 432,000 barrel per day monthly gains, collective targets will rise by 648,000 bpd in each of July and August. These increases reverse the deep production cuts made at the height of the pandemic and which would have been worked off by September. Now, they will be finished a month early. This is a concession to thirsty markets, and to pressure from the US, but has only a very small practical impact.
Three problems remain for OPEC+. First is the inability of most members – particularly Nigeria and Angola, but now joined by Russia – to produce up to quota. In response to the Ukraine invasion, the European Union has committed to ban nearly all imports of Russian oil by the end of the year, and to sanction shipping and insurance of the country’s oil cargoes. This hampers Moscow’s ability to reorient sales to Asia.
It was suggested ahead of the meeting that Russia’s compliance could be suspended, allowing Saudi Arabia and the UAE to make up some of the difference, but this has not happened, at least not yet. These two countries are now the only ones with substantial spare capacity, totaling about 3 million bpd.
Libya is exempt from targets, but a further political eruption has cut about 1 million bpd, most of its exports. The Iran nuclear deal looks to be on life support, keeping 1-1.5 million bpd of its exports off the market, and perhaps precipitating a worse crisis. Overall, OPEC+ fell short of its aim by 2.66 million bpd in April, and that will be worse in May and June.
Second is the status of the OPEC+ arrangements. The 2020 deal to cut production still runs until December. So, the question now is whether further increases will be agreed from September onwards. Only Saudi Arabia, the UAE and to some extent Iraq would see much benefit from higher targets. As even their spare capacity is dwindling, they will feel some should be held back until the full impact of the sanctions on Russia is revealed and to cover for other unexpected perils emanating from Tripoli, Tehran or elsewhere.
The organization will have to be cautious about risks of deeper COVID-19 lockdowns in China, demand destruction by high prices, and possible widespread recession. Several countries, such as Sri Lanka, Pakistan and Lebanon, are already struggling with economic crises exacerbated by high fuel prices.
So it would be risky to upset the framework, knowing that production cuts might be required again soon. Riyadh has come to value its relationship with Russia, which offered a variety of strategic and political benefits but, most importantly, allowed for oil market management without the ever-present threat of giving up sales to a major rival.
Third is the issue of refining. Brent crude, the main international marker, at $120 per barrel, is relatively high but not excessively so by historical standards. But after many refineries were shut down in the pandemic, capacity is severely strained. Refiners are making $40-50 per barrel in margins on petrol and diesel, far above usual levels, and leading to record prices at the pumps.
Only later this year, some new capacity in the Middle East, China and Nigeria might ease the situation. Until then, OPEC might reasonably argue there is little point putting more crude into a market that cannot process it. Indeed, while stocks of crude and, especially, refined products, are very tight in the countries of the Organization for Economic Co-operation and Development (OECD), global inventories of crude oil are more comfortable, and rising.
These factors mean that Saudi Arabia cannot do too much more within the OPEC+ framework. So far, it has managed to strike a clever balance: Making a show of some action to please the US, and ensuring finally that Biden will visit and demonstrate the Kingdom’s enduring importance, without alienating Russia. It is also helpful to ward off the prospect of the “NOPEC” bill making its way through the US Congress, which would allow lawsuits against OPEC for coordinating on supplies.
Saudi Arabia’s state oil company Aramco raised its official selling prices to Asia for July substantially, more than customers had expected, while prices to Europe rose by lesser amounts. It has accepted it will lose some market share to Russia from key importers China and India. It will retain market share in Asian countries wary of buying more from Russia – notably Japan, South Korea, Taiwan and Singapore. And it will sell more to Europe, helping to replace Russian oil.
The US, for its part, has tried face-saving measures; Biden’s visit has been spun as part of a wider Middle East trip, including Israel and the occupied West Bank, and with the Saudi leg intended for a GCC meeting and not specifically focussed on oil.
But the timing and the extensive groundwork done by Middle East envoy Brett McGurk and energy focal point Amos Hochstein indicates the truth: Saudi intervention, however limited, remains one of the most palatable among a menu of bad options for the US to bring down politically catastrophic fuel prices.
Robin M. Mills is CEO of Qamar Energy, and author of “The Myth of the Oil Crisis.”