Despite Biden’s highly-touted trip to Saudi Arabia just last month, leaders of the oil-rich nation are already proposing cuts in production to stabilize global supply and demand. Biden made the trip to secure a boost in production and the Whitehouse made a show of highlighting what they deemed as progress to that end.
As quick as a Texas afternoon rainshower, Saudi Arabia and OPEC have signaled a virtual “circling of the wagons” as they consider pumping fewer barrels. We’ll look at the key players behind this decision and where that leaves oil and gas going forward.
Saudi Arabia Proposes Output Cuts
It seems all but certain that crude production will be cut by OPEC, with its President signaling his support of the idea of the Saudi suggestion. These comments alone jettisoned the price per barrel of oil back over $100 this week as investors weigh slackening supply. As of August 26, 2022, Brent Crude Futures were up $1.65 to settle at $100.99 per barrel. WTI crude futures were also up by $0.56 to settle at $93.06. Sources told Reuters Tuesday that the United Arab Emirates signaled that it too is in line with Saudi Arabia’s proposal to curtail oil production. All of which may be a tit-for-tat response from OPEC regarding the Tehran Nuclear Deal between the U.S. and Iran.
As the de facto leader of OPEC, Saudi Arabia carries a lot of weight and signaled the possibility of introducing production cuts to balance the market. Recent volatility suggests a disconnect from basic principles of supply and demand, which Saudi Arabia is hoping to correct with a dip in production. The Tehran Nuclear Deal may bring additional Iranian oil to the market after sanctions are lifted which is why OPEC is looking forward to these proposed production cuts.
Despite what the Whitehouse says, oil prices have been down in recent weeks mainly due to fears of the world’s largest importer of oil reducing its demand. With COVID lockdown after COVID lockdown, China continues to roil global markets. Again, despite the Whitehouse narrative, the fact that the U.S. is in a technical recession also spooks investors which have contributed to the decline. Bear in mind, that OPEC had previously agreed to increase output in July and August of this year to combat the nearly 10 million bpd of cuts initiated at the height of the COVID pandemic.
Biden’s Disastrous Trip to Saudi Arabia in July
If you had your doubts about President Biden traveling to Saudi Arabia in July and pleading with Crown Prince Mohammed bin Salman for more oil, recent news from OPEC may have just settled the issue. The now-notorious image of Biden fist-bumping MBS is the perfect backdrop for the turn of events.
With plunging ratings at home, surging gas prices, and out-of-control inflation, Biden and his handlers needed any positive press they could take, especially with midterm elections just on the horizon. So, the President made a dubious trip overseas to Saudi Arabia to plead for greater oil production to ease surging U.S. gas prices. The response from the Saudis was underwhelming at best, and yet the Administration ran victory laps as if they’d just won the Daytona 500.
A “FACT SHEET” from the Whitehouse Briefing Room regarding the trip included the following:
“Saudi Arabia has committed to support global oil market balancing for sustained economic growth. The United States has welcomed the increase in production levels 50 percent above what was planned for July and August. These steps and further steps that we anticipate over the coming weeks have and will help stabilize markets considerably.”
Fact check, the announcement from the Saudis for a conceivable increase of 100,000 barrels per day was the lowest production increase in the entire history of OPEC. At odds with this mediocre increase, one month later, Saudi Arabia announces it was looking at cutting oil production to stabilize global oil supply and demand.
Biden Still Trying to Sell Our Nation’s Most Advanced Weapons For More Oil
The day after his trip to the Middle East, Biden made it clear that the U.S. was to remain heavily involved militarily in the Middle East. “Let me say clearly that the United States is going to remain an active, engaged partner in the Middle East. … We will not walk away and leave a vacuum to be filled by China, Russia, or Iran”, Biden remarked in a speech. Notwithstanding Russia’s longstanding quasi-membership with OPEC, Biden continues to contradict himself. In perhaps the biggest U.S. military failure since the Vietnam War, Biden decided to withdraw all U.S. troops from Afghanistan, leaving the U.S.-trained Afghan National Security Forces to be hunted and slaughtered by ruthless Taliban forces.
Just before the withdrawal, recall Biden’s famous remarks “This decision about Afghanistan is not just about Afghanistan. It’s about ending an era of major military operations to remake other countries. … Moving on from that mindset and those kind [sic] of large-scale troop deployments will make us stronger and more effective and safer at home.”
So, one year after saying that we would not have large-scale troop deployments in the Middle East, Biden says that the U.S. is essentially going to continue to maintain its military presence in the Middle East. According to the Whitehouse, we station several thousand U.S. troops at our bases in Saudi Arabia alone. If that’s not enough to make your head spin, consider this. In exchange for the Saudis pumping more oil, in July, Biden promised some $3 billion in arms sales of some of our nation’s most sensitive weaponry, with many more billions coming after that. Biden may have missed the class on the art of negotiation his predecessor wrote a book on.
How Markets Respond to OPEC Production Cuts
At Jackson Hole, Fed Chairman Jerome Powell made brief statements that certainly give oil and gas investors something to think about. JP made the point that a tight monetary policy was necessary “for some time” in order to combat inflation. This slow-growth model is expected to cause “some pain” for U.S. households and businesses, Powell admitted.
In a BBC interview, Kate Dourian of the Energy Institute explains, “OPEC+ tailors supply and demand to balance the market”. Essentially, OPEC can keep higher prices by limiting global supply. OPEC was created in 1960 to coordinate policies on oil supply. Countries that now belong to OPEC include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (the five founders), in addition to Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and the United Arab Emirates.
OPEC’s mission is simple—“to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers…a regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.”
Deciding to increase or decrease production is a response to volatility, liquidity, and macro-economic concerns. In an interesting global economics lesson, we see that even a hint of production cuts from OPEC translates to the markets responding immediately with rising oil prices.
Geopolitical Forces at Play
Washington continues to assert that China and Russia are the geopolitical adversaries du jour. Back to our troop withdrawal assertion, the Whitehouse concludes that removing our presence from the Middle East would create a vacuum that China would undoubtedly fill. Remember that OPEC+ is the designation for OPEC member countries along with Russia and its various allies.
As Russia has been a keen ally of OPEC for more than a decade, they definitely have a seat at the table. However, Biden has tried to paint two different pictures here. One in which Russia is the sole aggressor in Ukraine and we need to impose gas caps and restrictions on imports but forget them almost entirely in the Middle East equation. The restrictions on Russia have already had disastrous consequences in Europe where countries like Germany are facing a monumental crisis with the winter months looming and a lack of Russian supply. In the end, and despite the posturing, Putin continues to showcase just how dependent Europe is on the fuel running through its pipelines.
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Tyler Reed began his career in the world of finance managing a portfolio of municipal bonds at the Bank of New York Mellon. Four years later, he led the Marketing and Business Development team at a high-profile civil engineering firm with a focus on energy development in federal, state, and local pursuits and picked up an Executive MBA from the University of Florida along the way. Following an entrepreneurial spirit, he founded a content writing agency servicing marketing agencies, PR firms, and enterprise accounts on a global scale. A sought-after television personality and featured writer in too many leading publications to list, his penchant for research delivers crisp and intelligent prose his audience continually craves.
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