High stakes for oil markets, Mideast security as Biden heads to Saudi Arabia

While the recent oil price crash has taken some immediate pressure off US President Joe Biden's July 15-16 trip to Saudi Arabia, the talks still hold big stakes for oil market stability, the future of the OPEC+ alliance, longer-term supply and regional security risks.

Both sides are likely to want to mend relations that have been strained by Biden's campaign promise to get tough on Riyadh and Saudi Arabia's reluctance to tap into dwindling spare production capacity to lower prices.

"I think both sides have decided to put a floor under what had been a deteriorating, historically weak relationship," said Bob McNally, president of Rapidan Energy Group and former George W. Bush energy adviser. "So that's why I think everyone's looking for a positive tone here."

The trip was booked in June when oil prices were still surging, adding to intense political pressure on Biden ahead of the November midterm elections, where Democrats stand to lose control of Congress.

Platts Dated Brent dropped nearly $15/b in two days to be assessed at $109.95/b July 6. Dated Brent then rose $4.68/b on July 7 amid bargain-hunting and ongoing supply concerns.

Host of key issues

All of the issues that contributed to rising prices in May and June have yet to be resolved, said Rachel Ziemba of Ziemba Insights.

"What to do about Russian fuel and how to cut revenues and not volumes?" Ziemba asked. "How to deal with uneven future supply from OPEC+, regional security issues maintaining supply risks for [Gulf states] and the uneven supply/demand response post pandemic?"

Downplaying any of these risks or talking domestically about getting tough on Saudi Arabia just because oil prices have come down would be a mistake for the US, she said.

Oil will be a major part of the talks, but other objectives include reaffirming Saudi Arabia as a key ally for the US in the region following the rise of China, said Yousef al-Shammari, CEO and head of oil research for consultancy CMarkits.

"Of course this is coming at a critical time as Biden has midterm elections this year, and it is very important to control inflation," Shammari said. "Yet I highly doubt that Saudi Arabia will pump more than it will under the OPEC+ framework."

Regional security will be a top priority for Saudi Arabia, including countering the Iranian nuclear program and accessing advanced US defense systems to protect energy facilities, Shammari said.

Supply risks loom

Global oil supply remains a big question mark despite the crude market selloff, given that the flow of millions of barrels from the US Strategic Petroleum Reserve every week will end by November.

Hopes of returning modest amounts of Iranian or Venezuelan oil to the market have so far fizzled, and predictions of an intense Atlantic hurricane season could knock off US Gulf of Mexico production during the peak storm period from mid-August to mid-October.

The future of OPEC+ looms over the talks, as the US and Europe try to shrink Russian oil revenues while Saudi Arabia remains committed to partnering with Moscow on balancing global supply.

Helima Croft, RBC Capital Markets managing director of global commodity strategy research, does not think Biden will press Saudi leaders to break with Russia and upend the OPEC+ agreement.

"Rather the US is seeking immediate barrel support as part of a broad relationship reset, which will likely include more fulsome US security support," Croft said.

Future of OPEC+ alliance

A non-Gulf OPEC delegate had no concerns about the Biden visit disrupting the alliance.

"OPEC+ will continue to meet on monthly basis to assess oil market developments and take appropriate decisions if necessary," the source said on condition of anonymity.

Under the OPEC+ agreement, August production quotas will remain in place through the end of the year, though ministers could amend the deal when they next meet Aug. 3, especially if there is some kind of breakthrough from Biden's visit to Saudi Arabia. However, the Gulf delegate said he expected Saudi Arabia and the UAE, who together hold virtually all of the OPEC+ alliance's spare production capacity, would remain circumspect with their output, so as not to infringe on other members' market share and spark disgruntlement.

"Countries that have additional spare capacities will prefer not to use them to preserve the cohesion of the Declaration of Cooperation for the long term than to enjoy the temporary benefits of increased production in the short term," the source said.

Easing tensions

Biden pledged during his presidential campaign to reassess the US relationship with Saudi Arabia, end US support for the war in Yemen and "make sure America does not check its values at the door to sell arms or buy oil."

As oil prices surged following Russia's invasion of Ukraine and the rapid escalation of Western sanctions, Biden pressed Saudi Arabia to speed up production hikes, but OPEC+ stood firm.

Tensions between the US and Saudi Arabia eased when OPEC+ agreed June 2 to accelerate production hikes through the summer. The group's quotas will rise by 648,000 b/d for August, but it remains to be seen how much crude members will be able and willing to pump in the months ahead.

Rapidan's McNally thinks the June 2 agreement was the only concession on oil supply that the US expected to get from Saudi Arabia.

"I didn't expect there was going to be any kind of a Biden bump," in oil supply during his Saudi trip, he said.

McNally predicts Biden will tell the Saudis: "Thank you for accelerating the tapering," and both sides could agree to a "general willingness to act to increase more if needed to stabilize the market."