Will US President Joe Biden succeed in securing a pledge from Gulf oil producers to increase output to help cool down overheated prices during his much-anticipated Saudi visit this week?
The White House believes the Organisation of Petroleum Exporting Countries has enough spare capacity to raise oil production, but oil market analysts argue that even if Saudis agree to boost output with its limited spare capacity, it would have a limited impact on driving down the high fuel prices roiling the global economy.
The US and allies have been stepping up efforts to lobby Opec to hike output in an effort to tame high energy prices. Saudi Arabia and the UAE are the only Opec members with significant volumes of unused output. They currently have a buffer of about three million barrels a day, official data from the countries indicate.
According to analysts at the International Energy Agency, that is about 3.0 per cent of global oil output, and roughly equivalent to the amount of Russian oil that could be kept off the market by sanctions at year-end. But the margin of emergency supplies could be narrower than official figures indicate.
US National Security Advisor Jake Sullivan said Opec members have the capacity to take "further steps" to increase oil production despite suggestions from Saudi Arabia and the UAE that they can barely increase oil production.
“We do believe there is a capacity for further steps that could be taken,” Sullivan said in a press conference ahead of Biden’s Middle East visit. It’s ultimately up to Opec countries to determine what those additional steps entail, he said.
As president, Biden left on Tuesday night on his first visit to the Middle East, with stops in Israel, the occupied West Bank and Saudi Arabia on his agenda. He is meeting with leaders of nine Arab countries on Friday in Jeddah.
"We will convey our general view…that we believe that there needs to be adequate supply in the global market to protect the global economy and the American consumer at the pump," Sullivan added.
However, oil market experts say the White House understands Saudi Arabia is unlikely to move unilaterally and that Riyadh and other Gulf nations lack significant spare capacity.
“I think that a surge in Saudi production seems unlikely. “Saudi Arabia and Opec+ have very limited spare capacity, and they have to manage it carefully. I expect some anodyne statements from Saudi Arabia about helping to balance the global oil market, meet global demand, support economic growth and stability among the import countries,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies.
Oil prices retreated last week, but remain above $100 a barrel. World crude production and refining output are still struggling to keep pace with the post-pandemic rebound in demand and the supply disruption resulting from sanctions on Russia over the invasion of Ukraine. The price of gasoline remains a source of political peril for a president heading to mid-term elections with approval ratings near 40 per cent.
Biden said he won’t specifically ask Saudi King Salman or Crown Prince Mohammed bin Salman to raise oil production. The Saudis have already offered up one gesture of reconciliation before Biden’s visit by steering the Opec+ alliance to speed up its output increases this month and next -- rolling back the last of the production cuts introduced at the outset of the Covid-19 pandemic in 2020.
Shell CEO Ben van Beurden warned on June 29 that the world faces an “ever-tighter market” and a “turbulent period” because Opec has less spare capacity than assumed.
Oil giant Saudi Aramco says it can reach and sustain maximum production of 12 million barrels a day. Opec data show the country has only held this level for a single month, April 2020, in its many decades as a major oil producer.
Analysts said if the Gulf nations were to tap their spare capacity fully, it could backfire. Traders tend to grow anxious when the global market has nothing held in reserve to cover potential disruptions. The recent collapse of production in Opec member Libya due to renewed unrest has served as a reminder of the perennial risks to global production.
“They’re going to be judicious on how they deploy any remaining spare barrels,” said Helima Croft, chief strategist at RBC Capital. “I don’t think they want to exhaust all of their spare capacity as part of a strategic reset with the US.”
Analysts said another pressing problem the market faces is the lack of capacity around the world to make gasoline, diesel, and jet fuel.
US refineries are operating at 95 per cent of capacity, the highest in almost three years, as they strain to keep up with peak summer fuel demand. Years of underinvestment, coupled with the disruption to Russian oil-product exports, have spurred the White House to consider restarting mothballed refineries.
“This energy crisis needs long-cycle investment in infrastructure like refineries, and addressing energy and military security issues,” said Jeff Currie, head of commodities research at Goldman Sachs Group Inc. “The questions over Opec production capacity are a sideshow.” firstname.lastname@example.org
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