At the beginning of October, Saudi Arabia affirmed it would keep its voluntary oil production cut of 1 million barrels per day (bpd) until the end of the year and was in talks with the United States, which was brokering a deal on the normalization of Saudi-Israel relations.
But the Hamas attack on Israel on October 7 and the subsequent Israeli retaliation targeting Gaza upended, once again, the geopolitical landscape in the Middle East—the world's top crude oil exporting region where the biggest oil transit choke point is located.
Saudi Arabia's de facto ruler, Crown Prince Mohammed bin Salman, is the wild card in the Middle East's latest conflict, Reuters' George Hay wrote in a commentary this week.
Saudi Arabia Rethinking Middle East Policy
The Hamas attack on October 7 took place just as several Middle Eastern countries—including the large oil producer, the United Arab Emirates (UAE)—started to normalize relations with Israel. The U.S. Administration was also reportedly working on a Saudi-Israel normalization in relations.
Saudi Arabia, the world's top crude oil exporter, could be willing to raise early next year its oil production—currently at around 9 million bpd—if oil prices climb too high to win the goodwill of U.S. Congress. A possible agreement would have led to Saudi Arabia recognizing Israel in exchange for a defense deal with the United States, The Wall Street Journal reported days before the new conflict erupted and buried hopes of an imminent Saudi-Israel rapprochement that could have eased the tight global oil market. Related: Drone Attacks Syrian Gas Field as Israel Conflict Escalates
Now, the market is wondering whether to price in an even tighter supply should the United States tighten the enforcement of the sanctions on Iran's oil exports.
Oil supply from Iran, which has been rising in recent months to a 2018 high due to what appears to be weaker enforcement of the U.S. sanctions, could begin to shrink again, analysts say.
Saudi Arabia, which has just restored diplomatic relations with Iran, is siding with the Palestinian cause in the newest conflict, along with the other Muslim nations in the region, which happen to be some of the largest oil producers in the Middle East and globally.
In the wake of the Hamas attack, Saudi Arabia called for "an immediate halt to the escalation between the two sides, the protection of civilians, and restraint." But the Kingdom also hinted at Israel as it "recalls its repeated warnings of the dangers of the explosion of the situation as a result of the continuation of the occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities."
There is a rapid rethinking of the Saudi policy in the region, and the U.S. plans to normalize Saudi relations with Israel are put on ice, sources with knowledge of the Kingdom's thinking told Reuters last week.
Also last week, Mohammed bin Salman received a telephone call from Iran's President Ebrahim Raisi – a first for the leaders – in which the crown prince "underscored the Kingdom's unwavering stance in standing up for the Palestinian Cause and supporting efforts aimed at achieving comprehensive and fair peace that ensures the Palestinian people's legitimate rights," Saudi Arabia said.
After this week's deadly blast on a hospital in Gaza, Saudi Arabia hosted an emergency meeting of the Organization of Islamic Cooperation, which put the blame squarely on Israel.
The Executive Committee of the Organization of Islamic Cooperation slammed "the blatant and unprecedented Israeli aggression in the occupied Palestinian territory and the heinous massacres perpetrated against civilians in Gaza Strip by the Israeli occupation forces," and "strongly condemns the blatant targeting by Israel's brutal occupation forces of Al-Ahli Baptist Hospital in Gaza Strip."
Saudi Arabia May Not Rethink Oil Production Policy
The U.S.-Saudi relations have been strained under President Joe Biden and the Saudi and OPEC+ production cuts—aimed at "market stability" but in reality pushing oil prices higher—have deepened the rift between the Kingdom and the Biden Administration, which has been struggling to contain high prices at the pump for U.S. consumers.
Saudi oil giant Aramco currently holds 3 million bpd in spare oil production capacity, its CEO Amin Nasser said earlier this week.
The world's largest oil firm could raise production "in a couple of weeks" if necessary, Nasser added.
So far, neither the Saudis nor the Saudi-Russia-led OPEC+ pact have hinted at any change in the current policy to withhold supply to the market, despite robust demand and Wednesday's call from Iran for an oil embargo on Israel from the Islamic producers.
The OPEC+ group doesn't plan to take any immediate action or hold an extraordinary meeting in the wake of the Iranian call for an oil embargo on Israel over the war with Hamas in Gaza, OPEC+ sources told Reuters on Wednesday.
In the current geopolitical chaos in the Middle East, oil prices could shoot up to $95 again and even to $100 a barrel, but the U.S. shouldn't count on Saudi Arabia to contain a price spike. The Saudis and the Russians need high oil prices to cover spending on Mohammed bin Salman's flagship mega projects and Putin's war in Ukraine, respectively.
By Tsvetana Paraskova for Oilprice.com
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