An Oil Hat-in-Hand Visit to Saudi Arabia?

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Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The higher-for-longer outlook for commodity prices is prompting U.S. President Joe Biden to head to Saudi Arabia, once deemed a pariah state, to discuss energy security.

The price for West Texas Intermediate, the U.S. benchmark for the price of oil, is up some 65% since the start of the year, hovering at around $122 per barrel. That, in turn, is propping up consumer inflation, which in the U.S. economy hit a 40-year high for the 12-month period ending in May.

High energy prices account for the bulk of U.S. inflation. We told you earlier this week Biden berated big oil companies, Exxon Mobil in particular, for returning capital to shareholders rather than investing in the upstream activity that would bring more U.S. oil to the market. The U.S. sits alongside Saudi Arabia and Russia as a world leader in oil production, and with Russia under pressure from the war in Ukraine, it's left to the others to do the heavy lifting needed to erase a lingering supply-side deficit.

For more information, see June 14, 2022, article - There Are Few Tools to Arrest High Oil Prices.

Ostensibly to bolster Israeli security, Biden is off to Saudi Arabia, with his delegation expected to meet also with representatives from OPEC member Iraq. In geopolitical terms, the visit is meaningful given that Biden is tapped to meet with Saudi Crown Prince Mohammed bin Salman, the young monarch suspected of playing a decisive role in the slaying of Washington Post columnist Jamal Khashoggi, a vocal critic of the Saudi monarchy.

Biden's press secretary, Karine Jean-Pierre, reminded reporters on Monday that the president instituted what she said was a "Khashoggi ban" that is designed to ensure that "any country that seeks to use tools of repression against people abroad who criticize their government will pay a price."

Nevertheless, with mounting inflation spreading globally, and with the lack of spare capacity on the open market, Biden is left to seek support from less-than-savory allies.

"If he determines that the interests of the United States to engage with a foreign leader and that such an engagement can deliver results, then he'll do so," Jean-Pierre added.

In the wake of the criticism over a decision from men's elite golfers to leave the PGA for the Saudi-funded LIV golf tournament, Biden's visit is somewhat ironic. Golfers such as Phil Mickelson and Dustin Johnson were offered hundreds of millions of dollars just to sign on to the LIV tournament, prompting criticism that already-millionaires are getting blood money.

But the world economy and geopolitics are not sports. Not only is U.S. inflation running red-hot, but the global economy in general is buckling under the strains of supply-chain bottlenecks, workers shortages, COVID-19 lockdowns and war.

Last week, the World Bank estimated the global economy would grow 2.9% this year, compared to 5.7% in 2021. Before the outbreak of the war in Ukraine, the World Bank in January had expected the global economy would grow 4.1% this year.

"For many countries, recession will be hard to avoid," said World Bank President David Malpass.

Meanwhile, the price for petroleum-based commodities is expected to only increase. Joining the growing queue of forecasters expecting a higher-for-longer future, Swiss investment firm UBS raised its forecast for the price of oil, from $125 per barrel for Brent, the global benchmark, to $130 per barrel by September. WTI should trade at a $3-per-barrel discount to Brent.

A return from lockdown in China and still-healthy demand for road fuels in the U.S. economy should combine with supply-side shortages from the likes of Libya and Iran to support the price of oil for the time being.

"We think prices may need to rise further to trigger demand destruction and bring supply and demand back into balance," UBS analysts said in a research note published Tuesday.

Separately, London oil broker PVM notes that the U.S. does not necessarily need more oil from Saudi Arabia. Gross U.S. imports of crude oil declined from 10 million barrels per day (BBL/d) in 2006 to 6.3 million BBL/d on average so far this year. Saudi deliveries are down some 65% from 2006 levels to about 500,000 BBL/d, while shipments from Canada have more than doubled, from 1.8 million to 3.9 million BBL/d.

"No wonder that the U.S.-Saudi relationship has undergone profound changes--although, now that inflated pump prices in the U.S. hurt the chances of the incumbent administration to perform well in the midterm elections, the president is planning a visit to the 'pariah' state," wrote PVM's Tamas Varga.

But optics aside, the visit may be more of a holistic one in terms of global energy security. Prices at the U.S. gas pump are the clearest indication of a wave of economic malaise, but the price at the pump is more reflective of global events than domestic ones. While Biden's visit is certain to be fodder for news headlines, the global aspects of the visit should not be overlooked.

Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.