Jun 3, 2022 - Energy & Environment

The U.S.-Saudi thaw won't chill the crude market

Illustration of a plus sign formed by oil barrels

Illustration: Annelise Capossela/Axios

The White House had rather nice things to say about Saudi Arabia's role in the OPEC+ decision to unexpectedly speed oil output increases, but don't look for the new barrels to greatly cool off the market.

Catch up fast: OPEC, Russia and allied producers agreed Thursday to boost production by roughly 650,000 barrels per day in July and August, rather than 432,000 envisioned in the ongoing restoration of pandemic-related output cuts.

What's new: President Biden is slated to visit Saudi Arabia later in June, per multiple reports Thursday.

  • Biden had once vowed to treat the kingdom as a "pariah" over human rights abuses and journalist Jamal Khashoggi's murder, but the NYT notes the trip comes as Biden is "seeking to lower gas prices at home and isolate Russia abroad."

Why it matters: Russia's attack on Ukraine has sent oil prices to their highest levels since 2008 — and U.S. gasoline prices are at nominal record highs ahead of the midterm elections.

A few takeaways...

The market kind of shrugged. The OPEC+ move did not cause a steep price drop. "The oil market will still remain tight given the production boost is modest at best," Oanda analyst Edward Moya said in a note.

  • Rapidan Energy Group, in a note, projects that prices will continue rising into the third quarter before high levels will force a slowdown in consumption growth that bring them back down.
  • "[T]he additional OPEC volumes are unlikely to fully compensate for Russian export losses, or fix the products problem caused by crippling refinery shortages," RBC Capital Markets said in a note.
  • It's not clear how many new barrels will truly arrive. "While every producer has the freedom to increase production, only a few have the ability," oil analyst Ellen Wald tells Axios.
  • How quickly and by how much Saudi Arabia — OPEC's dominant producer — uses its spare capacity is a key focus.

Diplomacy has consequences. Rapidan noted the OPEC+ move follows "relentless pressure from the Biden administration for three months" and represents a "complete about-face in Saudi oil policy."

"[T]he deal represents the successful culmination of an intense, multi-month diplomatic effort that has seen a lot of air traffic between Washington and Riyadh by high level government officials," RBC said.

But there are a lot of moving parts too. Wald said market forces fueled the decision.

"Prices are very high and some producers have the ability to produce more and want to take advantage of the opportunity for greater revenue and potentially moving into new markets in Europe that were purchasing Russian oil," she said via email.

What's next: Traders will watch the effect of Europe's phased-in ban on Russian crude and how much new production truly stems from the OPEC+ move.

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