OPEC + heads for geopolitical showdown as Biden calls for more oil

OPEC + is heading towards a politically consistent showdown with President Joe Biden, as Saudi Arabia and its allies meet today to choose to heed US demands for more oil.

If the cartel rejects the request, it will head into a hand-to-hand fight with the White House, which fears inflation caused by high energy prices will derail its economic agenda. Giving in to the pressure and turning on the taps would keep Saudi Arabia’s closest ally, to the detriment of the hard-won rally in crude prices that swelled the kingdom’s coffers.

“You are looking at oil prices,” Biden told reporters at a press conference at the UN climate summit in Glasgow on Tuesday. Fuel costs are high due to the “refusal of Russia or the OPEC countries to pump more oil”.

It’s a fight that transcends the oil market and sinks deep into America’s troubled relationship with its longtime allies in the Middle East. Biden has so far refused to speak with Saudi Crown Prince Mohammed bin Salman, infuriating the royal palace in Riyadh, which had almost unlimited access to the White House during the Trump administration.

Despite the president’s arm twist, which was supported by Japan and India, several key members of the Organization of the Petroleum Exporting Countries and its allies show little sign of abating. Iraq and Kuwait, for example, have publicly stated that they should stick to the current plan – restarting just 400,000 barrels per day of unused supply each month and leaving the market in deficit for the rest of the year. .

The result is widely expected by OPEC observers, but diplomatic pressure continued on Wednesday, according to people familiar with the conversations, opening the door to a possible last-minute deal.

OPEC + is expected to stick to the 400,000-barrels-per-day reduction plan on Thursday, said Bob McNally, chairman of consultant Rapidan Energy Group and former White House official. “Unless there is a last minute deal between Washington and Riyadh or a twist of the arms.”

Either way, the oil market could experience a few volatile weeks as the conflict between the world’s largest producers and consumers unfolds in the aftermath of Thursday’s OPEC + meeting. This was evident on Wednesday, as crude futures fell 3.6% to $ 80.93 a barrel at 12:22 p.m. in New York City.

Production issues

If OPEC + bowed to US demands, it is unclear how much additional oil beyond the planned increase of 400,000 barrels per day would be enough for Biden. But if the cartel promised an increase of 600,000 or even 800,000 barrels a day for December, one would wonder if the group could follow through.

The group is already struggling to meet its monthly production targets, as the lack of investment in oil fields in countries like Angola, Nigeria and Kuwait is hampering production. Saudi Arabia, Russia and the United Arab Emirates might have the capacity to exceed their quotas to compensate for weaker countries, but that would require changes to the existing OPEC + agreement.

One of the reasons for OPEC + resistance is the risk that, if additional oil were provided, it could quickly tip the markets in the other direction. Supply is currently limited, but the balance is expected to return to surplus early next year.

“OPEC + expects a difficult year in 2022,” said Matthew Holland, analyst at consultant Energy Aspects Ltd. Some members believe that any additional barrels added now will only have to be taken off the market later. “The bar for OPEC + to add over 400,000 barrels a day in December is extremely high,” he said.

Oil reserves

If OPEC + ignores Biden’s request, the United States has other tools at its disposal. This could revive antitrust legislation against OPEC +, which is unlikely to have an impact on prices in the near term. There are more drastic measures, such as banning US crude exports, but these could hurt the US domestic oil industry and further disrupt world markets.

The most effective, and perhaps the most likely, measure would be a release of the strategic oil reserve. Such an action could have an even greater impact on prices if carried out jointly with other industrialized countries that are members of the International Energy Agency.

India and China, Asia’s biggest oil consumers with their own strategic reserves outside the IEA system, could also be called upon.

Since the inception of the IEA in 1974, there have been three coordinated releases of emergency fuel stocks. The first was in the build-up of the Gulf War in 1991, after Iraq’s invasion of Kuwait halted much of Middle Eastern crude exports. The second followed Hurricanes Katrina and Rita, which severely damaged US offshore oil facilities in 2005. The most recent action took place in 2011, to mitigate the supply disruption caused by the Libyan civil war.

“We believe the Biden administration is ready to release crude from the strategic oil reserve in an attempt to cap prices,” said Helima Croft, commodities strategist at RBC Capital Markets LLC and former CIA analyst.

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Felix J. Dixon

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