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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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U.S. Looks To Punish Saudi Arabia For Large OPEC+ Cut

  • Saudi Arabia’s latest move to cut crude oil production, despite U.S. please not to do so, should not have surprised Washington, and yet it did
  • The immediate impact on crude oil prices of the cut was not as dramatic as some had feared.
  • White House National Security Advisor, Jake Sullivan has changed his tone vis-a-vis Saudi Arabia.
White House

Despite repeated pleas from the U.S. that the Organization of the Petroleum Exporting Countries (OPEC), under the de facto leadership of Saudi Arabia, should not cut its collective crude oil production at its meeting last week it did just that. The White House had made it clear that a cut in crude oil production and the corollary rise in oil prices would lead to three outcomes that it sees as exceptionally dangerous for the world right now. First, it would add further impetus to the energy price-led surge in global inflation that has prompted rising interest rates around the world that are crimping economic growth. Second, it would significantly boost the state revenues of Russia, as a major exporter of crude oil and gas, enabling its illegal invasion of Ukraine to continue for longer on the back of that funding, costing more lives and increasing the likelihood of escalation into a global nuclear war. And third, it increases the chances that sitting U.S. President Joe Biden will do poorly in the November mid-term elections, making his government less likely to be able to deal effectively with the Russian- and Chinese-led security challenges that the world will face in the remainder of his presidency.   Disregarding these entreaties from the U.S., and echoed by the major European states, OPEC, under Saudi Arabia, cut its collective crude oil production by a gigantic two million barrels per day (bpd). Market expectations had been for a possible cut of around one million bpd, with a very remote possibility of one and a half million bpd, if OPEC decided to ignore all its Western allies’ arguments against a reduction. However, the latest cut is the largest crude oil production reduction since the 9.7 million bpd decrease in May 2020 that was implemented expressly to rescue oil prices from the once-in-a-lifetime threat posed to them at the height of the Covid-19 pandemic. This most recent two million bpd cut is set to last for 14 months, until December 2023. 

Related: Russia Not Ruling Out Repair Of Nordstream Gas Pipelines

The immediate impact on crude oil prices of the cut was not as dramatic as some had feared, but it might yet be very serious indeed, as it coincides with two other market factors, which the Saudis know perfectly well. The first of these is that the long-running program of releasing one million bpd crude oil from the U.S.’s Strategic Petroleum Reserve (SPR) – begun with the specific intention of the White House itself to bring oil prices down in order to dampen down inflationary pressures across the West - are scheduled to end this month. The second of these is that a European Union (EU) ban on seaborne imports of Russian crude is scheduled to go into effect on 5 December, while the G7 group of major industrialised nations is also looking at the mechanics of placing a price cap on Russian energy exports. 

Aside from knowing the huge upwards pressure that this historically enormous cut in crude oil supply would place on the global oil price, Saudi Arabia was also fully aware of the political ramifications of the cut for the U.S., for Europe, and for Russia, according to several sources in Washington and Brussels exclusively spoken to by OilPrice.com last week. “Senior EU energy security figures conveyed to leading OPEC countries that cutting crude oil production now could be disastrous for several proposed EU energy policies relating to Russian oil and gas sanctions, but these were ignored,” said one senior EU energy source. “The most senior figures in the Saudi government, including [Crown Prince Mohammed bin] Salman, also know exactly what these cuts and continued high energy prices mean for [President Joe] Biden in his mid-term elections,” he added. “The White House sees these OPEC cuts as a direct comment from Saudi Arabia’s highest leadership on what it thinks of the president, of our democratic process, and of our stand with our allies against the Russian invasion of Ukraine,” a senior energy source in Washington said to OilPrice.com last week.

As highlighted in all three of my books on the oil sector since 2015, there is a very clear link between oil and gas prices, the U.S. economy, and the chances of re-election as U.S. president. Historical precedent highlights that every US$10 per barrel change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, although recently this correlation has become even more dramatic. The corollary longstanding rule of thumb is that for every one cent that the U.S.’s average price of gasoline increases, more than US$1 billion per year in discretionary additional consumer spending is lost. It is a matter of historical fact, as shown in my new book on the global oil markets, that since World War I, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, presidents who went into a re-election campaign with the economy in recession won only once out of seven times (Calvin Coolidge in 1924, although strictly speaking he had not won the previous election but rather had taken up the position on the death in office of Warren G Harding). The U.S. economy contracted an annualised 0.6 percent quarter-on-quarter (q-o-q) in the second quarter of 2022, confirming the economy technically entered a recession, following a 1.6 percent q-o-q contraction on the first quarter of the year. Ahead of critical mid-term elections in November, President Biden faces not just a recession but also the prospect of severe vote-losing falls in the U.S. stock and housing markets. 

Saudi Arabia’s core geopolitical alignment away from the U.S. and towards Russia began in earnest at the end of 2016 when the Kremlin stepped in to support the then-beleaguered OPEC at the end of the 2014-2016 Oil Price War. Back in October 2021, the meeting between Russian Deputy Prime Minister, Alexander Novak, and Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, to discuss broadening and deepening the two countries cooperation in the energy sector and others marked another confirmation of the ongoing attempts by Moscow to decisively split the Kingdom away from its long-time ally, the U.S. This was subsequently evidenced by further meetings between the two figures to agree several major joint projects and Saudi Arabia’s unwillingness to condemn Russian aggression in Ukraine or even to engage with President Biden over bringing oil and gas prices down. Saudi Arabia’s move towards China as well began in earnest when it offered to save Salman’s face in the disastrous initial public offering of Saudi Aramco in 2017. Again, this has been subsequently reinforced with a slew of deals aimed at increasing China’s hold over Saudi energy supplies and in Saudi’s willingness to support China’s efforts to undermine the hegemony of the U.S. dollar in the world’s energy markets.

Therefore, Saudi Arabia’s latest move to cut crude oil production, despite U.S. pleas not to do so, should not have surprised Washington, and yet it did, and it is infuriated because it thinks it was a directed attack on it, and it is right, it was. Initially, U.S. officials condemned the decision as ‘short-sighted’ but then White House National Security Advisor, Jake Sullivan, and National Economic Council Director, Brian Deese, called it out for what it was, saying in a joint statement: “At a time when maintaining a global supply of energy is of paramount importance, this decision will have the most negative impact on lower- and middle-income countries that are already reeling from elevated energy prices.” 

They added that the Biden administration would consult with Congress on potential measures that would strike at OPEC’s control over oil prices, and this would include a resuscitation of the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill that would allow the producer group to be sued in U.S. courts for antitrust violations and could see the break up of Saudi Aramco and the reduction in its value to zero. The NOPEC bill already passed the Senate Judiciary Committee in May, having passed a House committee last year. Senate Majority Leader, and Democrat, Chuck Schumer stated just after this latest crude oil production cut announcement that: “What Saudi Arabia did to help [Russian President Vladimir] Putin continue to wage his despicable, vicious war against Ukraine will long be remembered by Americans…We are looking at all the legislative tools to best deal with this appalling and deeply cynical action, including the NOPEC bill.” Following this, and indicating cross-party support for a new aggressive approach to Saudi Arabia, Republican Senator Chuck Grassley, an original sponsor of the NOPEC bill, said that he will attach the measure as an amendment to the forthcoming National Defense Authorization Act.

By Simon Watkins for Oilprice.com


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  • Nathan on October 10 2022 said:
    The US fixed the Petro dollar in lieu of gold with Saudi Arabia.

    All Saudi Arabia has to do is disconnect/ stop selling oil in USD.

    Russia is already selling in Rubles.
  • Lexington Green on October 11 2022 said:
    It's America's energy independance (i.e. tiny amount of imports) that has driven OPEC production cut. It was inevitable, but they won't be able to sustain it. And, when US production reaches all time high in 2023, it will be even harder for them to cut production.

    Paybacks are hell.
  • Mamdouh Salameh on October 11 2022 said:
    The OPEC+ cut has indeed placed President Biden between a rock and a hard place. President Biden may want to punish Saudi Arabia by invoking the NOPEC Bill if necessary to sue it and OPEC+ for a so-called cartel-like manipulation of oil prices. But this is an empty threat for the following reasons.

    1- The first is that the NOPEC bill is unenforceable against OPEC+ since it isn’t a cartel. A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply and preventing competition or other restrictive practices. OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash. When it comes to limiting oil supply, a true cartel like the “Seven Western Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC accounts for only 34.7% of the global oil market and 30.8% of exports according to the 2021 BP Statistical Review of World Energy. Both the United States and Russia have 12% of the market each.

    2- The second reason is that if the United States tries to sue OPEC or any of its members, the organization could stop all its oil exports to the US. NOPEC only has jurisdiction in the United States but no extraterritorial jurisdiction under international law.

    3- The third reason is that if, however, the United States persists with mounting law suits against OPEC or its members, they could retaliate by withdrawing their investments and funds in the US and even replace the petrodollar with the petro-yuan. This would be the most serious retaliation against the US. Once Saudi Arabia and UAE have made the switch, the overwhelming majority of OPEC members will follow suit exactly as they did in 1975 when they adopted the petrodollar. This will literally pull the rug from under the petrodollar and the US financial system it underpins.

    My conclusion is that Saudi Arabia is capable of harming both the US financial system and the US economy far more that the US can harm Saudi Arabia. The Saudis seem to sense that the World Order is already transiting from a unipolar system led by the US to a multipolar one ushered by both Russia and China and therefore it has to adapt its policies to the new emerging order.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • Carlos Everett on October 22 2022 said:
    I do not think that Saudi gave this even a second thought-with the following thought process by Saudi's. Ok the EU/Nato/Ukraine battle was occurring and based on published facts, Russia is going to lose 2M/b/d of sales via crude and or refined products on December 5th. So this products ceases to exist, but this is caused by other parties, so to correctly predict sales for next year they think this 2 millions b/d will not be produced, so when they produce their numbers for Opec+, then it is down, but not because of Saudi, or any other Opec members. The fact is it will be down until the parties could get together and reestablised this level if this is even possible?

    Biden and his experts have no knowledgee of oil industry and the Saudi's are not the source behind this deal it is Russia, but as long as you have zero knowledge in the Biden cabinet in oil matters, these misunderstandings will continue and there could be serious damage when there really is not a problem, but Joe needs to find someone with local crude oil understanding, so that the Washington/Saudi relationships is not furthered strained.

    I will pray for some wisdom that hits Joe quickly and decides that Saudi's are our friends.

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