Here’s Why Saudi Arabia Won’t Heed Biden’s Call To Raise Production

Key Insights

• Joe Biden heads to Saudi Arabia to discuss oil markets. 
• An increase of oil production in Saudi Arabia and potential price caps for Russian oil will be the key negotiating points. 
• It will be a hard task for Biden to get anything out of the meeting as oil prices have already declined by 25% from their recent peaks amid recession fears. 

U.S. Will Try To Push Oil Prices Lower As Inflation Bites

U.S. President Joe Biden has started his trip in the Middle East with a visit to Israel, where he signed a pledge to crush Iran’s nuclear weapons ambitions. After Israel, Biden heads to Saudi Arabia, where he’ll try to convince Mohammed bin Salman to increase oil production.

Inflation remains the key worry for Biden ahead of the midterms in November. The recent inflation reports were really ugly, and attacking the price of energy seems to be the fastest way to deal with the current situation.

It looks that the U.S. will concentrate on two separate efforts during negotiations. First, Biden will try to push Saudi Arabia to produce more oil. Second, Biden will likely present his views on the idea to cap the price of Russian oil.

There Is No Reason For Saudi Arabia To Hurt Oil Prices

French President Macron has previously told Biden that Saudi Arabia and UAE cannot raise production in the near term. Currently, Saudi Arabia should be ready to produce about 11 million bpd. During the price war with Russia in the first half of 2020, Saudi Arabia produced 12 million bpd, but these production levels were not sustainable. An increase of 1 million bpd is what the U.S. is aiming for.

However, the timing is not favorable for successful negotiations. Oil prices have pulled back by roughly 25% from recent highs due to recession fears. Increasing oil production at this point will hurt the market even more. As an oil producer, this is not something that Saudi Arabia should be aiming for.

The price cap part of negotiations will be even more interesting. Russia has already stated that it hoped that the U.S. would not try to hurt Saudi – Russia relations. Due to sanctions, Russian oil is selling at a heavy discount to world benchmarks. Put simply, Russian oil is the cheapest oil in the market, which is available in large quantity. As a result, oil imports from Russia to India increased by 15.5% in June from May. At the same time, Saudi Arabia’s exports to India declined by 13.5%.

Not surprisingly, Saudi Arabia and other producers are losing competition to Russia’s cheap oil. Any price caps on Russian oil (assuming that Russia continues to supply oil on new terms) will further hurt Saudi Arabia’s position in the oil markets, so the U.S. should not get any support from Saudi Arabia on this front.

It remains to be seen whether Biden’s negotiations with Mohammed bin Salman will produce any market-moving news. Most likely, the sides will come up with some vague statement about raising oil production, but no decisive measures will be taken.

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