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Saudis are running out of patience with Biden – What’s behind the threat to cut oil production

By Dan Eberhart

This week Saudi Arabia threatened to cut production and prop up oil prices. OPEC+’s informal leadership has cited various reasons to justify its position, but the reasoning behind the move has a political underpinning – specifically, the Saudis’ distrust of the Biden administration.

It is no coincidence that the threat to cut production came this week while Biden is close to reviving a nuclear deal with Iran: arch-rival Saudi Arabia. Achieving an agreement would provide economic relief to Tehran and – albeit, to a lesser extent – ​​to the global oil market, since about 1 million barrels per day of Iranian oil would be freed from Western sanctions to be channeled abroad.

This development, combined with concerns about an impending economic recession, the inflationary rally and weakening demand, have driven oil prices below $100 a barrel.

But Riyadh will not stand idly by, watching Washington throw Tehran a lifeline.

The deal on Iran’s nuclear program, struck in 2015 under President Barack Obama and then-Vice President Joe Biden, was unpopular with American voters. President Donald Trump withdrew from the deal in 2018, strengthening ties between the US and Saudi Arabia.

It’s no secret that Biden wants oil prices – the main driver of inflation – to fall ahead of November’s midterm elections. The US president has repeatedly asked Saudi Arabia – most recently in mid-July when he himself visited the Kingdom’s capital – to help with this goal by increasing the supply. But Saudi leaders are resisting Biden’s request.

Thus, Iran remains as the only potential source of increasing oil quantities in the market. Biden has moved down that road, but now he is seeing the consequences of his choice.

Riyadh’s threat this week suggests Saudi Arabia wants to put a floor on the price of oil at $100 a barrel. The Biden administration can’t be happy about that.

Given what we’ve seen in the oil market in 2022, including OPEC+’s repeated failure to agree on increased producer quotas, it’s striking that the cartel’s largest member is even considering cutting production to support falling prices.

Something like political retaliation against Joe Biden for the agreement he is seeking with Iran and the improvement of Washington-Tehran relations in this case.

At the same time, this intention confirms that Saudi Arabia remains more aligned with Russia than with the US on the world political stage.

Russia is the other major producing power in OPEC+. It wants oil prices to rise as US and EU sanctions have hurt its ability to produce and export “black gold”. Moscow must sell its barrels at a deep discount – $30 a barrel – to find buyers in Asia as Europe turns its back on Russian energy and Western sanctions strain the Russian economy.

The recent “plunge” in oil has only been unfavorable for Moscow, as its profit margins from this market have shrunk significantly. The situation could become even more difficult as the West considers imposing a ceiling on the price of Russian oil in retaliation for the Kremlin’s invasion of Ukraine.

The Saudis, of course, still see Russia as an important member of the cartel and a – de facto – ally in the Middle East: more important than Biden’s USA.

And somewhere here the question arises: even if the US and Iran reach a deal on the Islamic Republic’s nukes, how much of a positive impact will it have if OPEC+ cuts production to keep prices from falling below the $100 mark? And the slightest hope of oil below $90 a barrel for an extended period of time looks unrealistic under current market conditions.

In addition, the Saudis are trying to demonstrate the need for more long-term investment in oil supply – another area where they disagree with the climate-focused Biden administration.

Biden’s climate-first policies have stymied wholesale market investment since he took office in early 2020.

Biden believes that the current tight supply situation can be addressed with existing sources and short-term political maneuvering – ie, releasing quantities of oil from strategic reserves, easing biofuel regulations, capping Russian oil prices to keep it in the market but to be cheaper etc. Saudis have a different perspective on the market.

Riyadh believes in a more gradual energy transition that will require continued heavy investment in wholesale oil supplies for decades.

Saudi Oil Minister Prince Abulaziz bin Salman said as much this week, when he referred to the “self-perpetuating vicious cycle of very thin liquidity and extreme volatility” in the oil market, which was “reinforced by bogus reports of demand collapse, repeated news for the return of large quantities of oil to the market, but also the uncertainty about the possible effects of price caps, embargoes and sanctions”.
It was a scathing criticism of rampant government intervention in oil markets, which has a negative impact on prices. The Biden administration is behind these actions – and the Saudis are running out of patience.

Source: Capital

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