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What is behind Saudi Arabia's threat to cut production and prop up oil prices this week?
The OPEC+ leader offered several market-related reasons for its position, but the real rationale is likely political – and is rooted in the Saudis' mistrust of the Biden administration.
It's no coincidence that the production cut threat comes this week as Biden nears reviving a nuclear deal with Iran – Saudi Arabia's arch-rival. Such an agreement would provide economic relief to Tehran and, to a lesser extent, global oil markets by unleashing about 1 million barrels a day of Iranian oil exports that Western sanctions have throttled.
This development, along with concerns about an economic recession, rising inflation, and weaker demand, has helped drive oil prices below $100 a barrel.
But Riyadh won't stand idly by while Washington throws a lifeline to Tehran.
The original Iran nuclear deal, struck in 2015 under President Barack Obama and then Vice President Joe Biden, was not widely popular with voters. President Donald Trump withdrew from the deal in 2018, prompting a dramatic improvement in U.S.-Saudi relations.
It's no secret that Biden wants oil prices, the main driver of inflation, to fall ahead of the midterm elections in November. The President has often pleaded with Saudi Arabia – most recently in mid-July during a visit to Riyadh – to help by adding more supply. But Saudi leaders have resisted Biden's requests.
That has left Iran as the only path to increase the amount of oil in the market. Biden is taking this path, but he's now seeing the consequences.
This week's threat suggests that Saudi Arabia wants to put a floor of $100 a barrel underneath the price of oil. The Biden administration can't be happy about that.
Considering what we've seen in oil markets this year with the repeated inability of OPEC+ producers to hit rising quotas, it's quite staggering that the largest member of the OPEC cartel is even considering cutting production to address the falling price.
It smacks of political retribution for Biden's pursuit of a nuclear deal and better relations with Iran.
It also confirms that Saudi Arabia remains more aligned with Russia than the United States on the global stage.
Russia is the other major producer in the OPEC+ alliance. It needs higher oil prices because U.S. and European Union sanctions have hurt its ability to produce and export oil. Moscow must sell its barrels at a steep discount of $30 a barrel to find willing buyers in Asia as Europe turns its back on Russian energy and Western sanctions tighten on the Russian economy.
That means the recent drop in oil prices has been especially harsh on Moscow since its oil profit margins have shrunk substantially. The situation could become direr as the West discusses a price cap system for Russian oil to punish Moscow for its invasion of Ukraine.
But the Saudis still see Russia as a critical member of OPEC+ group and an essential ally in the Middle East – more important than America under Biden.
It begs the question: even if the United States and Iran broker a nuclear deal, how much of a positive impact will it have if OPEC+ pares back production to keep prices from falling below $100? Any hope of sub-$90 oil for a prolonged period seems unrealistic under current market conditions.
It also looks like the Saudis are trying to make a point about the need for more long-term investment in oil supply – another area where it disagrees with the climate-focused Biden administration.
Biden's climate-first policies have thwarted upstream investment since he took office in early 2020.
Whereas Biden believes the current tight-supply situation can be addressed with existing sources and short-term policy maneuvers – releases from the Strategic Petroleum Reserve, loosening biofuel regulations, price caps that keep Russian oil flowing but at lower prices, etc. – the Saudis have a different outlook on the market.
Riyadh sees a much more gradual energy transition that will demand continued robust investment in upstream oil supplies for decades.
Saudi Oil Minister Prince Abulaziz bin Salman said as much this week when he spoke of the "self-perpetuating vicious cycle of very thin liquidity and extreme price volatility" in oil markets, and how it has been "amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions."
That's a scathing criticism of rampant government intervention in oil markets, which has damaged the price discovery function. The Biden administration has been the biggest perpetrator of these actions, and the Saudis have had enough.
https://www.forbes.com/sites/danebe...n-running-out-over-iran-deal/?sh=155ad7473404
The OPEC+ leader offered several market-related reasons for its position, but the real rationale is likely political – and is rooted in the Saudis' mistrust of the Biden administration.
It's no coincidence that the production cut threat comes this week as Biden nears reviving a nuclear deal with Iran – Saudi Arabia's arch-rival. Such an agreement would provide economic relief to Tehran and, to a lesser extent, global oil markets by unleashing about 1 million barrels a day of Iranian oil exports that Western sanctions have throttled.
This development, along with concerns about an economic recession, rising inflation, and weaker demand, has helped drive oil prices below $100 a barrel.
But Riyadh won't stand idly by while Washington throws a lifeline to Tehran.
The original Iran nuclear deal, struck in 2015 under President Barack Obama and then Vice President Joe Biden, was not widely popular with voters. President Donald Trump withdrew from the deal in 2018, prompting a dramatic improvement in U.S.-Saudi relations.
It's no secret that Biden wants oil prices, the main driver of inflation, to fall ahead of the midterm elections in November. The President has often pleaded with Saudi Arabia – most recently in mid-July during a visit to Riyadh – to help by adding more supply. But Saudi leaders have resisted Biden's requests.
That has left Iran as the only path to increase the amount of oil in the market. Biden is taking this path, but he's now seeing the consequences.
This week's threat suggests that Saudi Arabia wants to put a floor of $100 a barrel underneath the price of oil. The Biden administration can't be happy about that.
Considering what we've seen in oil markets this year with the repeated inability of OPEC+ producers to hit rising quotas, it's quite staggering that the largest member of the OPEC cartel is even considering cutting production to address the falling price.
It smacks of political retribution for Biden's pursuit of a nuclear deal and better relations with Iran.
It also confirms that Saudi Arabia remains more aligned with Russia than the United States on the global stage.
Russia is the other major producer in the OPEC+ alliance. It needs higher oil prices because U.S. and European Union sanctions have hurt its ability to produce and export oil. Moscow must sell its barrels at a steep discount of $30 a barrel to find willing buyers in Asia as Europe turns its back on Russian energy and Western sanctions tighten on the Russian economy.
That means the recent drop in oil prices has been especially harsh on Moscow since its oil profit margins have shrunk substantially. The situation could become direr as the West discusses a price cap system for Russian oil to punish Moscow for its invasion of Ukraine.
But the Saudis still see Russia as a critical member of OPEC+ group and an essential ally in the Middle East – more important than America under Biden.
It begs the question: even if the United States and Iran broker a nuclear deal, how much of a positive impact will it have if OPEC+ pares back production to keep prices from falling below $100? Any hope of sub-$90 oil for a prolonged period seems unrealistic under current market conditions.
It also looks like the Saudis are trying to make a point about the need for more long-term investment in oil supply – another area where it disagrees with the climate-focused Biden administration.
Biden's climate-first policies have thwarted upstream investment since he took office in early 2020.
Whereas Biden believes the current tight-supply situation can be addressed with existing sources and short-term policy maneuvers – releases from the Strategic Petroleum Reserve, loosening biofuel regulations, price caps that keep Russian oil flowing but at lower prices, etc. – the Saudis have a different outlook on the market.
Riyadh sees a much more gradual energy transition that will demand continued robust investment in upstream oil supplies for decades.
Saudi Oil Minister Prince Abulaziz bin Salman said as much this week when he spoke of the "self-perpetuating vicious cycle of very thin liquidity and extreme price volatility" in oil markets, and how it has been "amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions."
That's a scathing criticism of rampant government intervention in oil markets, which has damaged the price discovery function. The Biden administration has been the biggest perpetrator of these actions, and the Saudis have had enough.
https://www.forbes.com/sites/danebe...n-running-out-over-iran-deal/?sh=155ad7473404
