November 27, 2021

Saudis, Russians Consider Pausing Essential oil Production Increases In Retaliation To Biden SPR Release

Move would result in a historic surge in oil prices.

When commenting upon yesterday’s SPR release announcement by the Biden admin and many assorted hanger-on nations – which has backfired spectacularly sending the price of oil soaring since the rumor can no longer become sold so the news needs to be bought in line with every single SPR release in the past…

… we  said that not only  was the release far in order to smmal, but that in retaliation for the SPR launch, “ OPEC can easily consider halting the production hikes to counteract the detrimental SPR effect of lower oil costs on the needed recovery in global oil capex, probably justifying such action because prudent in the face of COVID demand risks.

Well, fast ahead just a few hours when moments ago the WSJ reported that the leaders of OPEC+ and the world’s two top oil producers  Saudi Arabia and Russia, are considering a pause to their recent efforts to provide the world with increased crude,   citing to people familiar with those discussions. The move, as expected, is within retaliation to Washington liberating tens of millions of barrels of oil in an effort to lower prices.

As a reminder,   OPEC+ is conference next week to review the long lasting deal they reached earlier this year to boost their collective oil output   – the deal involves boosting output by 400, 000 barrels a day each month through next year, until the group hits its pre-pandemic pumping level plus follows a sharp cut in output in 2020 as demand evaporated amid Covid-19 lockdowns.

However , it now appears that will OPEC+ may change the mind and not raise output at all; and while Biden will be quick to note that oil prices have hovered near multiyear highs, OPEC as well as other forecasting agencies have battled to predict demand among the on-again-off-again nature associated with Covid-19 restrictions. Several nations in Europe, for instance, are usually moving ahead with, or considering, fresh restrictions which could sap economic activity— and by extension demand for oil.

Meanwhile, the elephant in the room – the Biden-led crude release of up to 70 million barrels threatens to further scramble the supply-demand balance. As a result, and also to compensate for the new supply, the WSJ confirmed our conjecture and writes that  Riyadh and Moscow are actually considering a pause from the group’s monthly collective raise,   even as US lackey, UAE – an OPEC member that has clashed with Saudi Arabia more than OPEC policy in the past, and Kuwait are resisting the pause. Then again, what The ussr and Saudi Arabia want, they will get.

Saudi Arabia sees the released crude as potentially swelling global supply plus threatening to reduce prices, according to people familiar with the country’s thinking.

Problem then is what will Biden do after a potential escalation in the oil war, and whether the US will halt oil exports in counter-retaliation. Such a move, as Goldman explained yesterday, would result in a historic surge in oil prices and all terrible breaking loose. This is  what we said recently :

One final point: although it is not even the Biden admin is certainly dumb enough to consider it, some have speculated that will once the SPR release is shown to be a total disaster, Biden may implement an essential oil export ban. The problem: this could have catastrophic consequences. Because Goldman explains, a US export ban would significantly disrupt the US and global oil markets, and possibly be a counterproductive tool to try to lower oil prices.

The US exports 3 mb/d of crude and domestic pipelines would not be able to reroute these volumes to US refiners, which further don’t have enough capacity to process this much crude. This could leave excess US primitive supply quickly reaching container tops and forcing shut-in production, with investment and production soon to get into significant declines. At the same time, a global market would be deprived of 3 mb/d of US supply (light sweet crude that is Brent like in quality). Brent prices would therefore have to spike to push demand lower as there is not really enough spare capacity (nor suitable crude) to replace ALL OF US lost exports.

Finally, with the US a good importer of gasoline from Europe, US gasoline prices would spike to stop domestic demand, creating a adverse hit to US financial activity.

Visit think of it, this is exactly what Biden will do next.


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