President Joe Biden begins his visit to the Middle East with all eyes on his stop in Riyadh—the capital of the nation he called a pariah. Biden signaled that he would reconsider long-standing friendly relations at the start of his presidency.
A little over a year later, everything has changed for Biden and his team. They came into office with promises for a fast energy transition. Instead, the President, the Energy Secretary, and the Treasury Secretary are currently busy looking for ways to ensure there is enough crude oil for the U.S. economy—the same economy that hit an inflation rate of 9.1 percent last month. The visit to Saudi Arabia, according to the White House, is not about oil. It would probably be more accurate—and more truthful—to say it is not about oil only. Biden himself said ahead of his visit that oil would be among the topics discussed with his hosts during his Gulf visit.
The problem is that few expect this visit to yield any results in the oil supply department. In fact, the only people that seem to expect the possibility of success are from the White House, although even they are now admitting that there will be no immediate oil results from the trip. Analysts, on the other hand, are quite skeptical. Because Biden is not only going to Riyadh to ask for more oil. He will also have to try and convince OPEC's largest exporter to sign up for a price cap on Russian oil.
The cap may well include fuels, as the International Energy Agency's Fatih Birol suggested earlier this week, as Russia's fuel exports are quite substantial, too. And fuel exports to Saudi Arabia just doubled.
To begin with, Saudi Arabia's and OPEC's ability to boost production in line with Biden's hopes is questionable, and it has been questioned repeatedly in the past couple of weeks, ever since Reuters recorded French President Emmanuel Macron telling Biden that both the UAE and Saudi Arabia were near the limits of their capacity.
Since then, the UAE's energy minister has tried to clarify that the Emirati leader who spoke with Macron had meant that the two countries were maxed out as dictated by the baseline production rate used in the OPEC+ production deal, but few seemed to have been convinced because there is no verifiable information about any OPEC member's spare capacity.
Yet even if estimates of the spare production capacity of Saudi Arabia and the UAE are accurate, the fact that the two have not yet tapped this capacity is pretty telling. There is a reason it is called spare capacity.
"If Biden is hoping the visit to Riyadh will bring more Saudi oil immediately, he's going to be disappointed," Enverus director Bill Farren-Price told the F ahead of Biden's trip, noting the Saudis' and the Emiratis' reluctance to tap their spare capacity.
"The main reason to keep the spare capacity is because they're worried about losses elsewhere," JP Morgan analyst Christyan Malek told the FT.
Indeed, in the current tight supply environment, another field outage in Libya or a force majeure on its oil terminals would have a huge impact on oil markets if the Saudis and the UAE deploy their spare capacity.
There is another reason for this unwillingness, however. Earlier this week oil prices fell as the latest U.S. inflation data caused expectations of a hefty price hike to bloom. Indeed, now some analysts expect the Fed to raise the borrowing costs benchmark by a full percentage point.
This would be bearish for oil. Judging by this week's price developments, the bearish effect might be temporary, but it would still limit their upward potential, making large OPEC producers cautious with any output additions.
Per OPEC's own latest Monthly Oil Market Report, by the way, the cartel once again fell short of its production targets, although this time only by a few thousand barrels, producing 234,000 bpd in June than in May, when its target was 253,000 bpd. All eyes now would be on OPEC's report for July as the cartel agreed to add more to total output to help bring prices down.
And the price cap? Where the oil price cap is concerned, the only ones who seem to believe it could work are members of the Biden administration. Analysts, on the other hand, note difficulties such as the way the cap will be enforced on a market as complex as international crude oil. There is also the bigger problem of Russia's reaction to the caps.
"All the Russians need to do is cut exports and the global price goes higher, which is the last thing the Western countries want," one New York broker told Energy Intelligence.
Some authors have argued that Russia would not risk a drop in its oil production as it would damage long-term production potential, but really, this risk is much graver for international markets: Russia only consumes a quarter of the oil it produces, and its latest exports windfall will probably keep it going for quite a while.
"Most, or all, buyers of Russian oil would need to co-operate for a price cap to effectively hinder Russian revenues," Energy Aspects' Amrita Sen told the FT. "But China and even India and Turkey are unlikely to agree."
As to whether Biden's talk with MbS will yield a promise of more oil, it is possible. Whether or not the Saudis would deliver on such a promise if made is quite another matter.
As to whether they would throw their support behind the Russian oil price cap, that's an even more remote possibility after the Crown Prince's brother recently assured the media that relations between Riyadh and Moscow are as warm as the weather in Riyadh.
By Irina Slav for Oilprice.com
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