Saudis Snub White House As OPEC Reverses Output Hike

It’d be a shame if oil prices fell too much.

OPEC+ on Monday agreed to tighten supplies just weeks after Prince Abdulaziz bin Salman bemoaned what he described as a “disconnect” between paper and physical markets. It’ll be the first cut in over a year.

Much like a September increase agreed last month amid pressure from the White House, the planned October cut appeared mostly symbolic. 100,000 barrels per day won’t move any needles, but it could send a message.

Generally speaking, the narrative around lower crude prices goes something like this. The outlook for global growth is deteriorating, Chinese demand is imperiled by Xi Jinping’s commitment to a draconian COVID containment policy which continues to manifest in sweeping lockdowns and a relentlessly stronger dollar is weighing on commodity prices.

For Riyadh, though, a broken market is contributing to a disparity between prices and fundamentals, and the Kingdom is apparently keen to at least signal that producers are prepared to “fix” the situation. Never mind the somewhat counterintuitive notion that the best way to address market functioning issues is with supply cuts.

Somewhat ironically, OPEC+ is eyeing some of the same fundamental factors cited by those who suggest lower prices simply reflect the worsening outlook. If Chinese demand is indeed set to wane and if Iranian barrels do come back to market as a result of a revised nuclear deal with the US, it’s possible prices could drop materially. With the memory of 2020’s collapse still fresh, the cartel and its allies want to avoid another deep swoon, even if developed markets struggling with high pump prices and importers coping with terms of trade shocks could most assuredly use the respite.

“The OPEC and non-OPEC Ministerial Meeting noted the adverse impact of volatility and the decline in liquidity on the current oil market and the need to support the market’s stability and its efficient functioning,” the group said, in a press release Monday, noting that this month’s token increase “was only intended for the month of September.”

“This decision is an expression of will that we will use all of the tools in our kit,” Prince Abdulaziz told Bloomberg. “The simple tweak shows that we will be attentive, preemptive and pro-active in terms of supporting the stability and the efficient functioning of the market.”

Saudi Aramco enjoyed a bumper profit during the second quarter, although really, “bumper” is insufficient to convey the sheer scope of the windfall. Exxon and Chevron raked in a combined $29.5 billion in net income during the period. That was (easily) a record. Aramco made almost $50 billion by itself (figure below).

No listed company on Earth reported a larger quarterly profit. Free cash flow was $34.6 billion.

As late as Sunday, Russia still opposed an output cut, according to sources who spoke to the Wall Street Journal. Moscow was reportedly worried about the signaling effect at a time when the Kremlin needs to preserve as much bargaining power as it can with whatever buyers it can find. In all likelihood, the small decrease was meant to respect those concerns while satisfying Riyadh’s desire to send a message. “Higher volatility and increased uncertainties require the continuous assessment of market conditions and a readiness to make immediate adjustments,” the cartel said.

Obviously, the White House won’t be pleased. Joe Biden and Mohamed Bin Salman have a frosty relationship if they have a relationship at all. By contrast, the Crown Prince and Vladimir Putin are brothers in autocracy, notwithstanding any acrimony that accompanied the short-lived (and extremely ill-timed) price war that preceded the onset of the pandemic in early 2020. The murder of Jamal Khashoggi in 2018 was the last straw for some US lawmakers already vexed at the Kingdom’s never-ending efforts to restore a friendly government in neighboring Yemen, where the Iran-backed Houthis have held out against the Saudi-led coalition for seven years (and counting). Yemen hosts the world’s worst humanitarian crisis, followed by Syria, Ukraine and Kim Jong Un’s hermit kingdom.

Donald Trump, with help from Jared Kushner, was mostly successful at convincing the Saudis to play along with his administration’s efforts to keep pump prices low, but it came at a cost: Trump was compelled to shield MBS from the Khashoggi outcry and run interference on Capitol Hill, where Congress was inclined to curtail the prince’s capacity to wage an offensive war with US weapons. Since then, the world has largely (and unfortunately) forgotten Khashoggi, and the frequency of cross-border Houthi attacks effectively makes the Saudis’ security case for the Kingdom. Although most Americans abhor the idea that the price of filling up their gas tanks is dictated by a thirtysomething Mideast royal, many of the same Americans have grown increasingly fond of authoritarians over the last six years, which unfortunately manifests in the glorification of MBS’s Biden snubs.

Rather than court the Court, as it were, Biden instead opted for SPR releases, coordinated with America’s friends around the globe, while simultaneously working to restore a nuclear deal with MBS’s sworn enemies in Tehran. He also kneecapped the prince’s ally in Moscow. That the latter effort entailed freezing Russia’s hard currency reserves was probably unnerving in Riyadh. After all, the Kingdom runs on a dollar peg and owes its wealth to a system that entails recycling dollar-denominated oil proceeds into the same kind of G7 claims the West froze in retaliation for Ukraine.

It’s exceptionally unlikely that relations between OPEC (let alone OPEC+, given that the “+” is basically just Russia) will improve over the near-term. If Biden wants concessions from the Saudis, he’ll need to force them, but just like every other problem this White House has correctly identified, the administration prefers a white-glove approach, a strategy that’s doomed to fail in a world where all of America’s adversaries and frenemies, both foreign and domestic, took the gloves off a long time ago.