In support of his trip to Saudi Arabia this week, President Biden penned an oped carried in the Washington Post on Saturday the 9th of June, where he attempted to defray some of the likely criticism to come as a result of it. He characterized the trip thusly in the opinion piece-
“A more secure and integrated Middle East benefits Americans in many ways. Its waterways are essential to global trade and the supply chains we rely on. Its energy resources are vital for mitigating the impact on global supplies of Russia’s war in Ukraine.”
Nowhere in the piece does the president mention oil which may give the impression to the Saudis as being disingenuous. They know what’s on his mind. He has exhorted them to increase production multiple times. One problem he has to overcome in dealing with the Saudis and MbS, in particular, is his past inflammatory rhetoric toward the country, where as a candidate for president he threatened to make them, “a pariah state.” Kings and princes can have long memories when it comes to breaches of protocol and direct insults, and Biden may find he has some walking back to do if he has any hope of obtaining concessions.
One factor that clearly is not being considered in the rationale for this trip is the actual capacity of the 19 oil-producing states that make up OPEC+ to deliver more crude.
A report from Argus Media last week notes that the cartel and its non-member states have not been meeting established quotas for a variety of reasons.
“Production from the 19 Opec+ deal participants increased by 730,000 b/d to 38.26mn b/d in June, according to Argus' survey. This was more than 2.5mn b/d below the group's target for last month.” The article went on to note that most of the increase came from Russia, the output of which rose by 550K BOPD.
This doesn’t seem to be a platform from which the president can reasonably expect much help from the Saudis, and may actually not come as much of a surprise. In the recent G-7 meetings, French president Macron attempted to give him a 411, about the likelihood of OPEC+ having much left in the “tank.” I have argued in a number of Oilprice articles that under-investment over the last decade is now the pre-eminent driver of oil prices globally. As a Reuters article notes, this under-investment extended to the Kingdom during the low-price era that followed the 2014 oil crash. The Covid crash of 2020 further set back new exploration in KSA, and contributes to the tightness in supply that I have also documented.
Still, hope springs eternal, and President Biden has shown a determination toward reaching out to foreign countries in preference to engaging with producers in the U.S. The U.S. and Saudi security relationship that has lasted for decades, but has recently been suspended on Human Rights grounds, gives the president a bargaining chip. That makes it likely that President Biden will at least get a hearing in Riyadh.
There could be one final hurdle to overcome before any sort of announcement could be made. President Biden has been quite vocal about the reentry into the JCPOA nuclear arms deal with Iran, writing in Saturday’s oped-
“With respect to Iran, we reunited with allies and partners in Europe and around the world to reverse our isolation; now it is Iran that is isolated until it returns to the nuclear deal my predecessor abandoned with no plan for what might replace it.”
Saudi Arabia has been implacably opposed to this plan from its earliest days. The risk is that it frees Iran to develop nuclear weapons, and would give them ascendancy in the Middle-East region as a result. A position KSA holds now. There are other reasons why the two countries butt heads, but they all are relatively insignificant compared to this key issue. The timing of the latest push by the Biden administration is curious when juxtaposed against the seeming gravity of this trip. The Hill summarized KSA’s objection to news that talks were restarting in an article-
“U.S. and Iranian officials met in Doha in hopes of reviving the 2015 global nuclear deal with Iran — the very deal that Riyadh opposes because it won’t prevent Iran from developing nuclear weapons over the long term and because it would do nothing to curb Tehran’s terror sponsorship and other destabilizing regional activities.”
This could be a sticking point for which there is no easy workaround.
Your takeaway
Will there be a photo op? These visits between world leaders are normally carefully “choreographed” toward the final press conference and joint statement of the parties. Seating arrangements, position on the stage and even the order of their entry into the room can be revelatory about the success of the proceedings. All leading to that final photo of them smiling and shaking hands.
With what we know it is very likely that President Biden will come away with some modest concessions in terms of increased oil production, but nothing that will offset the emerging imbalance between supply and demand that we noted in the “Real Reason Gasoline And Diesel Prices Are So High article last month. In this scenario, we see oil prices remaining in the current low $100’s band, for several months.
As we head into fall we think the easiest path is higher, possibly back to the $120-$130 range. The support the SPR releases have provided to the market will be over. The under-performance by OPEC+ in delivering agreed quotas to the market continues for the reasons we have discussed. Additional government stimulus could also provide unexpected demand. Discussions are underway now for a $500 billion+ stimulus plan to blunt inflation impacts on low-income taxpayers. All of these are bullish for crude as we exit the year, and noted energy analyst Amrita Sen commented in a webcast recently with Eric Nuttall, that we could see a Brent price in the $180s as we exit the year.
Whatever the outcome of President Biden’s trip to Saudi Arabia I see the bull case remaining intact for oil in spite of the current sell-off due to the reemergence of Covid in China and the resultant lockdowns. This also makes the case for oil equities which declined way out of proportion to the June decline in WTI.
Investors looking for growth and above-average income can turn to companies like Devon Energy, (NYSE:DVN) for a great entry point, less than 5X operating cash flow. As recently as the first week of June this multiple was 8.5. Other similar opportunities abound in this sector.
By David Messler for Oilprice.com
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