(DING LIN/XINHUA VIA AP)
April 7, 2023, at 5:24 a.m.
Riyadh, Saudi Arabia - The recent decision by Saudi Arabia and its allies to reduce oil production has been seen by many as a rebuke to the Biden administration, but experts suggest it is more about self-interest than anything else.
Analysts have been speculating about the motives behind the recent coordinated oil production cut, led by Saudi Arabia and involving other oil-producing nations, which amounts to a reduction of over 1 million barrels per day. The move has prompted questions about whether it is a rebuke to the Biden administration, a sign of closer ties with China, or simply a move by the Gulf nation to safeguard its own economic interests.
President Biden dismissed the recent coordinated oil production cut led by Saudi Arabia, which caught many observers off guard. Despite the President's reassurances that the impact would not be as severe as anticipated, the news had an immediate effect on the oil market, with Brent crude - the international benchmark - rising from the $75 range to $85 a barrel in just 10 days.
In 2020, then-presidential candidate Joe Biden pledged to hold Saudi Arabia accountable for journalist Jamal Khashoggi's murder, which U.S. intelligence services believe was sanctioned by Crown Prince Mohammed bin Salman. However, in the summer of 2022, with rising inflation and gasoline prices exceeding $5 per gallon, President Biden visited Jeddah and was photographed "fist-bumping" the Saudi leader, despite denying he was requesting more oil production. Three months later, Saudi Arabia cut its oil production.
This move by Saudi Arabia may have been influenced by the Biden administration's decision not to refill the Strategic Petroleum Reserve as oil prices fell. As the price of oil fell below $80 per barrel, Saudi Arabia, one of the world's largest low-cost producers of oil, saw its revenues decline. With the country having significant control over the global price of oil, heightened fears of a recession and the recent banking crisis in the U.S. likely added to the Saudi concerns.
According to Cindy Beaulieu, Managing Director and Portfolio Manager at Conning, the decision by the Biden administration not to refill the Strategic Petroleum Reserve was a strategic mistake, and the current geopolitical situation with oil is becoming increasingly interesting.
The China Syndrome
The recent move by Saudi Arabia to cut oil production has been seen by some as a rebuke to President Biden's policies. However, the decision may be driven by more complex factors related to Saudi Arabia's shifting geopolitical position and domestic priorities.
During the Cold War era, Saudi Arabia - like many other nations - viewed the world through the lens of a global struggle between the superpowers of the United States and the Soviet Union. However, in recent times, the Gulf nation has been seeking to expand its circle of allies beyond the traditional military power-based duopoly. This strategic shift is likely motivated by a desire to enhance Saudi Arabia's geopolitical standing and address its domestic needs.
BCA Research stated on Tuesday that the recent production cuts by OPEC 2.0 represent a bold preemptive measure aimed at countering the possibility of supply-side price weakness. According to the research group, the cuts may be a response to the aggressive monetary policy moves by systemically important central banks led by the US Federal Reserve, as well as a lack of follow-through on the re-filling of the US Strategic Petroleum Reserve (SPR), which the Biden Administration is appearing to walk back.
BCA further suggested that the recent move by Saudi Arabia marks a significant shift in the kingdom's economic and political policies, which now prioritize Saudi interests. This, in turn, is likely to exacerbate the already-widening rift between the Kingdom and the US.
Saudi Arabia is currently engaged in a large-scale modernization program and is increasingly dependent on technical and financial support from China. This reliance has only grown in the aftermath of Russia's annexation of Ukraine, as China has taken on the role of a peacemaker between the two nations.
In a move that could have significant implications for the Middle East, the foreign ministers of Saudi Arabia and Iran met in Beijing on Thursday to discuss the reopening of embassies and consulates in each other's countries. The meeting represents a significant victory for China's foreign policy and comes after the two countries restored diplomatic relations last month, a deal that was reportedly brokered with China's help. While it is unclear whether the meeting will have any immediate impact on oil prices, Roberta Caselli, a commodities research analyst at Global X, has said that it "does not yet signal a clear path in terms of pricing pressure on oil."
Back to $100?
Amidst the upcoming cutbacks in oil production led by Saudi Arabia, some oil experts are forecasting a surge in oil prices to $100 a barrel in May, just before the peak gasoline demand in the U.S. during the summer driving season. However, recent economic data reveals the possibility of a U.S. recession this year. The increasing unemployment claims, contracting manufacturing sector, and falling bond yields are all contributing factors. The expected decline in energy demand due to the economic slowdown would likely prevent it from rising as much as anticipated with a growing economy. Senior Economist at Allianz Trade North America, Dan North, has been cautioning against the Federal Reserve's extraordinary monetary policy tightening through rapid interest rate increases, which could ultimately lead to a recession.
Allianz Trade North America Senior Economist Dan North has warned that the recent rise in weekly jobless claims, coupled with a decline in job openings, hiring weakness, and rising layoffs, signals an end to the hiring boom. North also notes that consumer spending has declined for three out of the last four months and points to the recent banking crisis as reasons for hiring to slow down. The softening of the labor market could dampen demand for oil, particularly if a recession hits, which some economists predict is likely. The recent Saudi-led cutbacks could be an attempt to buttress markets in anticipation of a possible economic slowdown.