Oil: U.S. Spat With Saudi Unlikely To Alter OPEC+ Policy Plans

The relationship between the White House and Saudi leadership has soured tremendously since OPEC+, led by Saudi Arabia, decided to cut oil production against the Biden Administration’s wishes. The White House has also expressed anger at Saudi Arabia’s recent sentencing of a U.S. citizen to 16 years in a Saudi prison for writing tweets that the Saudi government doesn’t like. Some analysts are calling this a “new low” for U.S.-Saudi relations. For traders, the question is whether anything will come of this growing spat. Will this impact global oil production or the market as a whole?

The first point to understand is that the Biden administration wanted higher production numbers from OPEC+ in hopes of dropping oil prices in the short term. There is an election coming up on November 8. Although the presidency is not at stake, all congressional seats and 1/3 of Senate seats are. Typically, the party that holds the Presidency (the Democratic Party) is blamed for high gas and utility prices like those we are currently seeing in the U.S. If the Democrats lose too many Congressional and Senate seats, their agenda will be stymied by the legislature. This is why Biden’s team is particularly nervous about the political repercussions of high gasoline prices going into the election.

However, election day is less than two weeks away. Once the election is over, there will be less political pressure on the White House to push for lower oil prices—at least until the next election in 2024. Traders should not be surprised if the rhetoric from the White House on this topic quiets down after election day.

If Biden’s team wants to do something to help bring down energy prices for consumers, there are several actions that would help promote domestic energy production and make it easier to transport necessary energy products to areas that need them. For example, the White House could simplify and clarify the regulatory situation for domestic producers. This would give producers faith in the future of production in the U.S. and incentivize them to invest in increasing production. It could suspend the Jones Act, which would make many more ships available to transport products like diesel fuel and heating oil to the northeast, where inventories are low. Biden could relax tariffs on steel that are making it difficult for oil producers to get specific steel products they need.

However, these actions would negate the “green” policies espoused by the White House and the Democratic party, so there is little chance that the White House will take such actions. In fact, we may soon see U.S. production start to decline due to regulatory challenges and the high cost of supplies and labor for production. Outside of the Permian region, U.S. production is declining.

In reality, there is little the U.S. government can or will do to pressure Saudi Arabia to increase oil production, even if the U.S. government cares to do so after the election. U.S. presidents have traditionally not commented publicly on Saudi oil policy, even when it caused difficult and detrimental economic and political situations. Past presidents have never even tried to force Saudi Arabia’s hand through other avenues, such as suspending weapons sales or denying military aid. Saudi Arabia is the second largest customer for the U.S. weapons industry and this industry has a very strong lobby in Washington. They won’t let the U.S. government ruin its relationship with Saudi Arabia easily.

Most likely, the U.S. government will do little or nothing of consequence to Saudi Arabia, so it will likely continue to pursue its desired oil policies. This means that traders can expect to see lower production quotas from OPEC+ as the group prepares for what many think is an upcoming global recession.