Saudi Arabia is apparently willing to bring more oil to the world market in order to curb global price increases. The West had been demanding this since the outbreak of the Ukraine war, but the Arab oil giant had so far ignored pleadings from Europe and the United States. A reversal is now emerging. With the new stance, Saudi Arabia is reacting to the decline in Russian oil production and to political concessions by the USA. Oil prices fell Thursday on news of Saudi accommodation.
So far, Riyadh has rejected Western demands, citing its cooperation with Russia. The Saudi-dominated oil cartel Opec with its 13 member countries and ten other producers such as Russia had agreed on the “Opec-Plus” platform to only cautiously increase production volumes by around 400,000 barrels (159 liters each) per day after the pandemic – that’s not enough , to mitigate the price increase due to the Ukraine war.
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This funding amount is valid until the end of this month. At a meeting in Vienna on Thursday, Opec-Plus decided not only to produce an additional 400,000 barrels per day (BPD) in July and August, but 648,000 BPD.
Russia can apparently no longer keep its promises because the Russian oil industry is in trouble because of Western sanctions. After the withdrawal of international oil multinationals from Russia, there is a lack of modern technology and foreign investment. The longer the sanctions stay in place, the worse the prospects for the Russian oil industry will become. In April, Russia produced around 9.3 million BPD, well below its agreed contribution of 10.44 million BPD in Opec Plus, according to the Reuters news agency.
The Russian government expects oil production to fall by up to eight percent this year. The EU, the main buyer of Russian oil, decided on Monday to cut its imports from Russia by two-thirds to punish Moscow for the Ukraine war. The US had already imposed an import ban on Russian oil. The International Energy Agency (IAE) estimates that the global market will lose up to three million BPD over the course of the year due to sanctions against Russia. That could drive the price up further.
Saudi Arabia, the leading OPEC nation, is aware of these risks and has no interest in letting oil prices spiral out of control, the Financial Times reported on Thursday, citing whistleblowers with insight into Saudi deliberations. Riyadh has therefore given Western countries to understand that Saudi Arabia will produce more oil if Russian production should drastically collapse. According to Reuters, Saudi Arabia and other producers could produce more oil to offset Russia’s woes.
The Saudis’ new understanding of the Western demand for more oil is also linked to a relaxation in relations between Riyadh and Washington. US President Joe Biden has so far avoided the traditional ally in the Gulf and avoided direct contact with the Saudi ruler, Crown Prince Mohammed bin Salman.
According to US intelligence services, the crown prince was responsible for the murder of Saudi regime critic and journalist Jamal Khashoggi in 2018. Biden therefore called Saudi Arabia a “pariah” state. But now, according to US media reports, Biden is considering a trip to Saudi Arabia. The visit would be a political upgrade for the crown prince and a commitment by the USA to the alliance with the Gulf States, which complain about America’s turning away from the Middle East.
Expanding Saudi oil production ahead of the visit would be a friendly gesture to the US, as American motorists are also feeling the effects of higher oil prices. The prospect of more Saudi oil sent oil prices down more than 2 percent on Thursday.
However, even the production capacity of Saudi Arabia is not sufficient to guarantee stable prices in the long term in the event of a further drastic decline in Russian production. The kingdom is currently pulling 10.5 million barrels of oil a day and can’t increase production much further. Collectively, Opec members could add less than two million barrels a day to the market, according to Reuters.