Biden’s Risky Middle Eastern Rubicon

President Joe Biden begins his visit to the Middle East with all eyes on his stop in Riyadh, the capital of the nation he has called a pariah. Biden signaled he would reconsider longstanding friendly relations early in his presidency.

A little over a year later, everything has changed for Biden and his team. They came to power with the promise of a rapid energy transition. Instead, the president, energy secretary, and treasury secretary are currently busy looking for ways to ensure there is enough crude oil for the U.S. economy – the same economy that has reached an inflation rate of 9.1% last month. The visit to Saudi Arabia, according to the White House, is not about oil. It would probably be more accurate — and more truthful — to say it’s not just about oil. Biden himself said ahead of his visit that oil would be among the topics discussed with his hosts during his visit to the Gulf.

The problem is that few expect this visit to produce results in the oil supply department. In fact, the only people who seem to expect the possibility of success are from the White House, even though they now admit that there will be no immediate oil results from the trip. Analysts, on the other hand, are quite skeptical. Because Biden is not just going to Riyadh to ask for more oil. He will also have to try to convince OPEC’s biggest exporter to subscribe to a price cap on Russian oil.

The cap may well include fuels, as the International Energy Agency’s Fatih Birol suggested earlier this week, as Russia’s fuel exports are also quite large. And fuel exports to Saudi Arabia double.

For starters, the ability of Saudi Arabia and OPEC to ramp up production in line with Biden’s hopes is questionable, and it has been questioned repeatedly over the past two weeks since Reuters recorded the French President Emmanuel Macron telling Biden that the United Arab Emirates and Saudi Arabia were close to the limits of their capacity.

Since then, the UAE’s energy minister has attempted to clarify that the Emirati leader who spoke to Macron meant the two countries were at maximum as dictated by the base generation rate used in the OPEC+ production deal, but few seemed to have been convinced because there is no verifiable information on any OPEC member’s spare capacity.

Yet even if estimates of spare capacity for Saudi Arabia and the United Arab Emirates are accurate, the fact that both have yet to tap that capacity is telling enough. There’s a reason it’s called reserve capacity.

“If Biden is hoping that the visit to Riyadh will immediately bring in more Saudi oil, he’s going to be disappointed,” Enverus director Bill Farren-Price told The F ahead of Biden’s trip, noting Saudi and government reluctance. Emiratis to exploit their reserve. ability.

“The main reason for keeping spare capacity is that they fear losses elsewhere,” JP Morgan analyst Christyan Malek told the FT.

Indeed, in the current tight supply environment, another field failure in Libya or a force majeure event at its oil terminals would have a huge impact on oil markets if the Saudis and the United Arab Emirates deploy their spare capacity. .

There is, however, another reason for this reluctance. Earlier this week, oil prices fell as the latest inflation data from the United States raised expectations of a sharp rise in prices to bloom. Indeed, some analysts now expect the Fed to raise the borrowing cost benchmark by a full percentage point.

That would be bearish for oil. Judging from this week’s price action, the bearish effect could be temporary, but it would still limit their upside potential, making major OPEC producers cautious about any production additions.

According to OPEC’s latest monthly oil market report, the cartel fell short of its production targets again, but this time only by a few thousand barrels, producing 234,000 bpd in June compared to May. , when its target was 253,000 bpd. All eyes would now be on OPEC’s report for July as the cartel agreed to add more to total output to help bring prices down.

Related: Europe now imports more US oil than Asia

And the ceiling price? When it comes to capping oil prices, the only ones who seem to believe it could work are members of the Biden administration. Analysts, on the other hand, note difficulties such as how the cap will be applied in a market as complex as international crude oil. There is also the bigger problem of Russia’s reaction to the caps.

“All the Russians have to do is reduce their exports and the world price goes up, which is the last thing Western countries want,” a New York broker said. Told Energy intelligence.

Some authors have argued that Russia would not risk a drop in its oil production because that would harm its long-term production potential, but in reality, this risk is much more serious for international markets: Russia consumes only a quarter of the oil that ‘it produces, and its latest windfall of exports will probably keep it going for some time.

“Most, if not all, buyers of Russian oil should cooperate for a price cap to effectively hamper Russian revenues,” Amrita Sen of Energy Aspects told the FT. “But China and even India and Turkey are unlikely to agree.”

As to whether Biden’s talks with MbS will produce a promise of more oil, it is possible. Whether or not the Saudis will keep such a promise if it were made is another matter altogether.

As to whether they would support Russia’s oil price cap, that’s an even more remote possibility after the crown prince’s brother recently assured the media that relations between Riyadh and Moscow are as hot as the weather. in Riyadh.

By Irina Slav for

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