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OPEC reaffirms slightly higher oil output

Biden due in Saudi Arabia in mid-July, but some analysts say the kingdom doesn’t have a lot more production capacity

The headquarters of the Organization of the Petroleum Exporting Countries in Vienna on March 3. (Lisa Leutner/AP)
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With President Biden preparing to visit Saudi Arabia in July, the kingdom and its oil-exporting allies ratified slightly elevated crude oil output while waiting to see whether additional spare capacity would be needed to deal with sanctions on Russia or output disruptions in countries such as Libya or Nigeria.

OPEC Plus — a combination of the 13-member Organization of the Petroleum Exporting Countries and an informal group of non-OPEC members led by Russia — met virtually June 30 and reaffirmed an earlier decision to add 648,000 barrels a day to oil markets in July and August. Virtually all of that would come from Saudi Arabia and the United Arab Emirates, said Helima Croft, head of global commodity strategy at RBC Capital Markets.

Biden wants Saudi Arabia and the emirates to take action to lower oil prices, with West Texas Intermediate crude hovering around $110 a barrel, U.S. gasoline prices averaging $4.87 a gallon and consumption rebounding from pandemic-era lows. But Riyadh wants Biden to come without demands on oil exports and instead bring a package deal that would include additional U.S. defense support to help the kingdom fend off the threat posed by Iranian-backed militias in Yemen.

U.S.-Saudi relations have been tense. Crown Prince Mohammed bin Salman’s alleged involvement in the killing of journalist Jamal Khashoggi has fueled condemnations. And Biden harshly criticized the crown prince during the 2020 presidential campaign. The United States does not want Saudi Arabia to drift diplomatically closer to China and Russia, but it has few levers to pull.

Speaking after the Group of Seven meeting this week, U.S. national security adviser Jake Sullivan told reporters that Biden’s talks with Saudi leaders would be “not focused on, or confined to, the energy piece, but the broader strategic dynamic at play.”

When asked at a news briefing in Spain whether he would ask the crown prince and other regional leaders to raise oil production, Biden said “No, I’m not going to ask them.” But he added “I’ve indicated to them that I thought they should be increasing oil production, generically -- not to the Saudis particularly.” And he said hoped other Persian Gulf leaders would recognize that higher output was “in their own interest” and “makes sense to do.”

Frank A. Verrastro, a senior adviser at the Center for Strategic and International Studies, said that so far, “we’re not sure what the quid is or the quo.” But he added that summer was a bad time of year to push Saudi Arabia and other producers in the Persian Gulf to boost production because of the need in Saudi Arabia to build in an extra 800,000 barrels a day for the country’s air conditioning needs. “I think there’s some room to relax or accelerate the lifting of the quotas and put a little more on the market,” Verrastro said, “but the timing is bad.”

Sadad al-Husseini, a former Saudi Aramco geologist and consultant, said that as of May, Saudi Arabia, Kuwait, Iraq and the UAE had a total of 2 million barrels a day of spare capacity, half of it in Saudi Arabia.

But Husseini noted that there are production shortfalls in many other OPEC member states. Nigeria and Angola, for example, experienced output declines of 42 percent and 36 percent, respectively, from their oil quotas, taking a total of 1.2 million barrels a day off the market.

“The biggest risk is Libya,” said Fernando Ferreira, director of geopolitical risk at the Rapidan Energy Group, a consulting firm based in Washington. The North African nation ruled by the U.N.-recognized government in Tripoli has 400,000 barrels a day offline. Political strife in eastern Libya could take an additional half-million barrels a day off the market if a rival government blocks exports from the oil-rich Sirte Basin. Talks in Cairo sponsored by the United Nations have failed to yield an agreement.

In Iraq, an additional 1 million barrels a day of crude oil — about a quarter of the country’s output — could be blocked by disputes among factions there. Over the past week, members of parliament bickered in Baghdad, a rocket attack hit the Khor Mor gas field, and three major U.S. oil-field service companies said they would comply with a court ruling against the semiautonomous Iraqi region of Kurdistan. Until recently, Iraqi exports had grown quickly.

Iran has said that it has large amounts of crude oil on tankers waiting to be delivered quickly and that it can increase its output by as much as 1 million barrels a day if U.S. sanctions are lifted as part of a renewed agreement limiting Tehran’s nuclear program. But talks between Iran and the United States and other world powers, which resumed early this week in Qatar’s capital after a three-month hiatus, ended after two days with no progress reported.

French President Emmanuel Macron rattled some leaders at the G-7 meeting when he said that UAE President Mohamed bin Zayed al-Nahyan told him that neither Saudi Arabia nor the UAE had meaningful amounts of extra oil production capacity. UAE Energy Minister Suhail Al Mazrouei later said that the president had meant that the two countries were near their maximum production capacity, but not yet there.

However, there remains considerable uncertainty about the size of OPEC’s spare capacity.

“We are not sure how much gas is left in the tank,” Croft, of RBC Capital Markets, said in a note to investors.

The OPEC Plus quotas have taken on new importance, given the desire to cut off Russian oil sales to Europe and the United States in response to Russia’s invasion of Ukraine. Germany and Poland expect fully to halt oil pipeline purchases from Russia by Dec. 5. Oil delivered by sea also has been diverted to China and India.

Verrastro estimated that Russia had lost only 500,000 to 1.5 million barrels a day of exports.

But he warned of logistical hurdles because some of the refineries in Europe were engineered to process the Russian grade of oil that is no longer available to them with sanctions in effect.

Husseini said the problem of high oil prices was bigger than daily output.

“Given the losses of Russian supplies and the underproduction from Nigeria, Angola, etc., the problem is much bigger than Saudi Arabia’s spare capacity,” he said in an email. He said he “can’t believe all those brilliant Europeans and think tanks in the U.S. hadn’t thought about this energy fiasco!”

He added: “OPEC can’t fix this. The bitter truth is it’s either a negotiated peace in Europe or an energy crisis that will sink the whole global economy for the rest of the decade.”

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