In the mid of uncertainty of US President Joe Biden’s visit to Riyadh, Saudi Arabia and other OPEC states are likely to boost oil production to offset a drop in Russian output. If done so, it will be a move that could ease sky-high oil prices and surging inflation.
Sources said that the group was working on making up for a drop in Russian oil output as Russia’s production has fallen by about 1 million barrels per day (bpd) as a result of Western sanctions on Moscow over its invasion of Ukraine.
Following the news of the possible OPEC output boost, oil fell $3 to about $113 a barrel, however, it was still near a more than decade high after a spike this year close to an all-time peak of $147.
What is OPEC+ and what’s its function?
OPEC+ is a group of 15 countries that include Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, IR Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The main function of the OPEC is to impose output quotas in order to regulate and manage the supply of oil on international markets.
OPEC+ also contributes in regulating oil prices and controlling the overall demand for oil. OPEC+ also monitors various supply and demand figures with regard to the world economy, market speculations and other scenarios that will affect crude prices.
Latest developments and meetings
Citing to a OPEC+ source familiar with the Russian position, Reuters wrote that Moscow could agree to other producers raising production to compensate for Russia’s lower output, although not necessarily making up all the shortfall.
According to the source, the compensation could ultimately be agreed but a decision might not be taken at Thursday’s meeting of OPEC+, an alliance of the Organization of the Petroleum Exporting Countries, Russia and others.
But it’s reported that a decision on the matter was “highly possible” at Thursday’s ministerial meeting.
Bitterness in US-Saudi relation: Causes and outcomes
After two years of strained relations, US diplomats have been working for weeks on organizing Biden’s first visit to Riyadh. The causes of bitterness between the twos were disagreements over human rights, the war in Yemen and US weapons supplies to the kingdom.
Despite the prince’s denial of the charge, US intelligence has accused Saudi Crown Prince Mohammed bin Salman, known as MbS, of approving the 2018 killing of Saudi journalist Jamal Khashoggi.
In addition to this, Saudi Arabia and its neighbor the United Arab Emirates have been frustrated at the Biden administration’s opposition to their military campaign in Yemen and failure to address Gulf concerns about Iran’s missile program and its regional proxies.
The U.S. administration has sought more supplies from Gulf allies such as Saudi Arabia and from Iran, specially with the Ukraine war adding to a tight crude market. Iran’s output has been restricted by US sanctions that could be lifted if a nuclear deal is reached, and Venezuela, also under US sanctions.
Rocketing gasoline prices, US inflation and Expected Biden’s visit to Riyadh
Because of the rocketing gasoline prices, US inflation has risen to a 40-year high, hitting Biden’s approval ratings as he approaches mid-term elections. However, Biden has refused so far to deal with MbS as Saudi Arabia’s de-facto ruler.
Report says Washington wants clarity on oil output plans before a potential Biden visit for a summit with Gulf Arab leaders, including MbS, in Riyadh.
About Biden’s visit, it’s also reported that the issue was not only tied to oil production, but also to Gulf security issues and human rights. According to the source, Reuters writes, both Riyadh and Washington had been showing more readiness to listen to the other’s concerns.
On Thursday, OPEC+ ministers hold online talks on when they had been widely expected to stick to an existing plan for a regular monthly increase of 432,000 bpd, mirroring previous meetings when they have spurned calls a bigger output hike.
Main oil producers, exporters in the world
Russia is the world’s second largest oil exporter, and according to a range of industry estimates, western sanctions could reduce production from Russia by as much as 2 million to 3 million bpd. And, Russia was already producing below its OPEC+ target of 10.44 million bpd in April with output running at about 9.3 million.
It’s also expected that Russia might be ready to agree to other members of OPEC+ to fill a gap in its output in order to preserve unity in the group and maintain support from the Gulf, which has tended to take a neutral stance over the Ukraine war.
When the pandemic hammered demand, OPEC+ agreed to slash output by a record amount in 2020. The group has gradually wound down that deal, which expires in September. The group will by then have limited spare capacity to lift output further.
Saudi Arabia is now producing 10.5 million bpd and has rarely tested sustained production levels above 11 million bpd.
UAE is the only other OPEC state with significant ability to produce more oil, though OPEC is estimated to have less than 2 million bpd of spare capacity in total.
Quoting to the chief commodities analyst at SEB bank, Reuters writes, “There is not much spare oil in the market to replace potential lost barrels from Russia,” said Bjarne Schieldrop.
So, there is now seen a sign of the possibility that Saudi Arabia may be ready to allow other members of OPEC+ to boost output in order to compensate for Russia’s lower output, especially due to the sanctions.
But it’s still not clear whether OPEC+ is likely to come up with an agreement, and whether an agreement will materialize.