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With pleading, threats and praise, US pushes Saudi Arabia to stop the oil bleeding: Fuel for Thought

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With pleading, threats and praise, US pushes Saudi Arabia to stop the oil bleeding: Fuel for Thought

"You can love me or hate me/I swear it won't make me/Or break me/I'm going wherever the money take me"

Lil Wayne

A dozen years after Louisiana-bred songwriter Lil Wayne rapped that verse on a bonus track on his album "Tha Carter III," a strong mix of love and hate is being directed at Saudi Arabia from US oil state lawmakers.

US President Donald Trump last Thursday, for example, tweeted of a global, Saudi-coordinated supply cut of 10 million b/d or more even as sources claim he is still considering tariffs on Saudi crude and limits on US imports of OPEC crude as ways to blunt the impact of the oil price crash on domestic producers.

The kingdom’s price-crushing plan to ramp up its crude production to record levels of 12 million b/d is causing maximum pain on US oil companies, particularly those in the capital-intensive shale patch, many of whom are warning of mass layoffs and bankruptcy.

But the hurt is manifesting itself in rather confused and contradictory ways, with lawmakers alternately pleading with the Saudis to end their price war with Russia and seeking ways to punish them with tariffs, embargoes and even a withdrawal of US military support.

The oil state politicians are simultaneously blaming Saudi Arabia for the nosedive in global oil prices and courting the kingdom to help the powerful US industry stave off collapse.

On March 16, 13 Republican senators sent a letter to Saudi Crown Prince Mohammad bin Salman urging the OPEC kingpin to stem the slide in oil prices.

“We urge the kingdom to assert constructive leadership in stabilizing the world economy by calming economic anxiety in the oil and gas sector at a time when countries around the world are addressing the pandemic,” the senators wrote, some following up with a phone call with Saudi Arabia’s US ambassador.

On March 25, six Republican senators wrote to Secretary of State Mike Pompeo and called Saudi Arabia a “direct threat” to the US oil and gas sector and suggested that the Saudis should leave OPEC and partner with the US on “strategic energy infrastructure projects” throughout the world.

“Riyadh should leave the antique OPEC cartel immediately and join the United States on the global stage as a free market energy powerhouse,” they wrote.

Senators' stance on Saudi Arabia

Five senators signed both letters: Alaska’s Lisa Murkowski and Dan Sullivan; North Dakota’s John Hoeven and Kevin Cramer; and Oklahoma’s James Inhofe.

Cramer and Sullivan have called for an end of US military support for Saudi Arabia, and Cramer has called for a ban of US imports of Saudi and other OPEC crudes.

The clear contrast between the pleading and threats of these US lawmakers reflects the rapidly changing views on Capitol Hill of OPEC, or, more specifically, Saudi Arabia.

OPEC and its de facto leader Saudi Arabia have long served as a punching bag to beat upon in congressional hearings and press conferences when oil and gasoline prices got too high during reelection season.

For two decades, various members of Congress have introduced the No Oil Producing and Exporting Cartels, or NOPEC Act, which would allow the US to sue OPEC members for price manipulation under the Sherman Antitrust Act.

Now, some of the lawmakers who spoke in fiery opposition to OPEC were calling for unity with the organization’s leading producer.

“It’s a very different and peculiar period in history between the US and OPEC,” said Sarah Ladislaw, a senior vice president with the Center for Strategic & International Studies, in an interview with the Platts Capitol Crude podcast.

Where once OPEC was an easy target to blame for high prices at the pump, the strategic reality has changed for the US, as its economy and national security hinges, potentially more than ever, on the health of its energy sector.

While a coordinated supply cut between, for example, Permian and Saudi producers still seems far-fetched, some global market management may ultimately emerge.

US imports of OPEC crude

Demand hit may outweigh supply power

OPEC has acknowledged that managing the global oil market is too tall a task for it to take on by itself, which is why it recruited Russia and nine other non-OPEC partners in 2016 to implement three-plus years of production cuts, which were roundly mocked and criticized by US lawmakers at the time.

Saudi Arabia on Thursday called for an “urgent meeting” of the OPEC+ alliance and other producers to negotiate a deal on output cuts that could stem the freefall in oil prices.

But how much impact even a historically significant production cut may have on prices remains unclear.

In a new report, Andrew Stanley, a consultant at the King Abdullah Petroleum Studies and Research Center, argued that OPEC has long had ability to measure and offset oil market shocks through the use of its spare capacity. This spare capacity has been a “substantial stabilizing force” for the oil market, reducing oil price volatility by as much as half and offering the market a “buffer” from dramatic price swings.

The impact of the spread of the coronavirus on global oil demand, however, is simply too big for OPEC to rebalance the market alone, Stanley writes.

“The magnitude of the current disruption is far beyond what OPEC can deal with alone, leading to the current situation which is in no one’s best interest,” Stanley wrote. “Greater international cooperation is needed.”

What such international cooperation looks like, and whether the US may play a role, remains an open question, and one market observers are keenly interested in seeing answered.

For now, the Saudis remain unmoved.

They are most likely following Lil Wayne’s advice: not letting all this love and hate make or break them and just going wherever the money takes them.

Fuel for Thought is a weekly column published first in S&P Global Platts Oilgram News