The Big Picture

US-Saudi Push-Pull on Market Management

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  • Market management dynamics — and producer-consumer relations — are entering uncharted territory.

  • US influence on oil supply remains limited amid a more distant US-Saudi relationship, and as Washington backs an energy transition which Opec-plus sees as a long-term threat.

  • Last week’s Opec-plus decision averted a worsening of consumer-producer ties, but the oil price issue will resurface.

After weeks of mounting tensions between oil producers and consumers over rising crude prices at a time of global energy shortages, shifting markets allowed for something of a middle ground to be reached following last week's Opec-plus meeting, when the producer group walked back from talk of pausing its planned supply additions. But Washington's willingness to intervene directly in oil markets to address high domestic gasoline prices and inflation levels is being viewed by the producer alliance as complicating its — so far successful — market management efforts.

That step itself was a symptom of the bigger hiccup in the US-Saudi relationship: Amid concerns that in the Mideast Gulf that Washington is not a reliable security partner in the region, and that US-Saudi ties are no longer as robust as they once were, Riyadh has limited incentive to respond to US requests to release more barrels to the market when prices climb.

But the two sides' response to the recent market rally and retreat offer clues as to how each will handle their side of the producer-consumer relationship under the new sets of circumstances. Signs are that Washington will follow a mix of new and old strategies — from flexing its muscles on strategic stocks releases to backing arms sales, with US President Joe Biden this week publicly endorsing a missile sale to the kingdom. For both, flexibility looks key.

Strategic Release, Flexibility

Its request for additional barrels rebuffed by Opec-plus at its November meeting, Washington launched a bid to leave its own stamp on the market. While US politicians have long been sensitive to prices at the pump, energy prices have become a higher-stakes political game in the US, where Biden is taking hits for inflation that threaten his agenda, including his climate action goals. Last month saw the US, India, China, Japan, South Korea and the UK put some muscle behind their months-long diplomatic pleas for an increase in output, via announced sales from strategic stocks.

Amid consistent warnings of such a move, price forecasts came off their highs of $100 per barrel. Then, on news of Covid-19's Omicron variant, crude prices crashed days before the Dec. 2 Opec-plus meeting — resulting in Washington no longer needing to push for supplies in excess of the nameplate 400,000 barrel per day additions that the alliance had planned. The producer group opted to steer clear of an output "pause" seen by consumers as the most inflammatory response.

Looking ahead, both Riyadh-led Opec-plus and the Washington-led coalition of consumers are laying claim to a “flexible” approach to supplies that enables them to intervene imminently if need be. US officials made clear they could hold back releases for now but reach for the Strategic Petroleum Reserve (SPR) again if prices start to cause economic pain. Opec-plus, meanwhile, left its meeting "open" — signaling to the market that the alliance could quickly change its policy without having to call for an emergency meeting.

More Talk, Even if Not at Highest Level

After making good on its threat to deploy the SPR, the Biden administration sent a diplomatic delegation consisting of US Deputy National Security Adviser for International Economics Daleep Singh, Deputy Commerce Secretary Don Graves and Energy Security Envoy Amos Hochstein to Riyadh. Hochstein did not ask for an oil supply commitment ahead of the Opec-plus meeting, but instead sought to ease tensions, which was well received by Riyadh, Energy Intelligence understands.

Last week’s talks, which followed a visit from US National Security Adviser Jake Sullivan in September, nevertheless centered around energy and the economy. US Climate Envoy John Kerry also recently met with Saudi Crown Prince Mohammed bin Salman, also known as MBS, and Deputy Energy Secretary David Turk met with Saudi Energy Minister Prince Abdulaziz bin Salman at length on the sidelines of the COP26 climate summit in Glasgow.

But Washington is still not willing to put Biden in a room with the Saudi crown prince. “The Saudis assumed that rising gas pump prices would force Biden to deal directly with MBS, despite promises to his party he would not,” said Kirsten Fontenrose, director of the Scowcroft Middle East Security Initiative at the Atlantic Council. “But the Omicron virus variant may have altered this assumption ... relieving the pressure on Biden to bend.”

New and Old Diplomatic Pillars

The Biden administration has been trying to widen the aperture of its energy diplomacy. Early in the administration, Washington and Riyadh announced the Net-Zero Producers Forum, along with Norway and Qatar, aimed at fostering exchanges on emissions reductions among oil and gas-producing countries. And administration officials focused on climate have been complimentary of Riyadh’s clean energy initiatives.

“The lash-up on climate and energy transition could wind up being a new, solid pillar in the US-Saudi relationship if both countries seek it,” Fontenrose said. But “to start, the US will have to stop sending contradictory messages, first ‘stop investing in fossil fuels’ [and] then ‘pump more fossil fuel.'" The view from many Opec-plus producers is of a hostile policy environment, even if a bumpy transition path affords them market leverage in the short term.

Also at issue are Riyadh’s concerns around regional security. Biden took a tough line on Saudi Arabia on the campaign trail and remains focused on changing the US footprint in the region from force deployment to force “projection.” He has continued former President Barack Obama's attempt to pivot away from the region, in part on assumptions of Saudi Arabia’s waning relevance as the global economy moves away from fossil fuels.

The perception is of an uneven partner. “There’s a sense that nothing is guaranteed anymore, and that leaves people in the region feeling insecure … I sense a great dissatisfaction, really a sense of distress,” Jon Alterman, with the Center for Strategic and International Security, told an Arab Gulf States Institute in Washington seminar this week.

Riyadh is seeking alternative ties: Just this week, French President Emmanuel Macron met directly with Prince Mohammed in Riyadh. And Biden's support for the sale of air-to-air missiles to Saudi Arabia — shortly before an effort to block the sale was defeated by US lawmakers — could partly quiet nerves in the region. But there's likely no return to the old groove of US-Saudi oil dynamics, now a more complicated affair in the energy transition era.

Opec/Opec-Plus, Non-Opec Supply, Security Risk
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