Five people familiarized with the discussions claim that Saudi Arabia has expressed to its Western allies its willingness to increase oil production in the event sanctions significantly reduce Russia’s output.
The White House wants to encourage production increases, but the oil price is near $120 a bar, the highest level in a decade. Saudi Arabia has not responded, saying that the energy crunch could worsen. Saudi Arabia believes it must have spare production capacity.
However, there are fears of severe shortages as the EU has imposed more sanctions against Moscow. The EU also banned importing Russian oil from Russia by sea.
The EU has also reached an agreement with the UK to stop the insurance of ships carrying Russian crude oil. Analysts believe this will severely hamper Moscow’s ability and willingness to send oil to other parts of the world. “Saudi Arabia is conscious of the risks and is not in their interest to lose control of oil prices,” said one person briefed.
Oil prices dropped Thursday. They were trading at $112.80/barrel in early trades after closing on Wednesday. Prices reached a new two-month high of $120/barrel this week.
The discussions took place before the monthly meeting of Opec+, the Opec+ oil producer association. Saudi Arabia believes the market for oil is extremely tight, which has helped to buoy the price rise. However, the industry sources and diplomats briefed in the discussions indicated that there are no real shortages. As the Covid-19 global economic recovery (including the reopenings of major Chinese cities) boosts demand, Russia’s crude oil production falling substantially could change. Russia produced more global crude than 10% before the invasion by Ukraine.
Pressures have developed between the US administration and Saudi leadership, especially with Crown Prince Mohammed bin Salman, the Saudi kingdom’s de facto ruler. Saudi Arabia has consistently rejected the White House’s and G7’s calls to accelerate production growth immediately.
A person who has been familiar with diplomacy said that several visits by a high-ranking US delegation in recent weeks have contributed to improving the relationship. They included Brett McGurk as White House co-ordinator on Middle East policies and Amos Hochstein as White House energy envoy.
People familiar and familiar with the talks indicated that Saudi Arabia has agreed to a shift to calm prices as part of an approach with Joe Biden. It also assured that it would eventually react by raising oil production should there be an oil supply crisis.
Ali Shihabi, a Saudi commentator with a good understanding of US leadership, thought that such steps would be possible to ease relations ahead of President Biden visiting this year.
According to one diplomatic source, talks had begun about an immediate increase in production from Saudi Arabia and the United Arab Emirates. This might be announced at Thursday’s Opec+ meetings. However, this has not been completed. Opec+ might still adhere to its production plan, which was in place since the Covid crisis began. Sources claim that production increases set for September will be moved up to July and August, though approval from the group is required.
Christian Malek of JPMorgan’s global energy strategy was concerned that Saudi Arabia wasn’t using all its potential. “It believes it needs enough reserves to respond to the changes in the market,” he said.
“While it would be premature for them to exhaust all its spare capacity, they are prepared to respond if an oil market spiral becomes too volatile. They view their excess capacity as the last resort against the danger of oil spiraling upwards in recession.
Saudi Arabia’s energy secretary, Prince Abdulaziz bin Salman has said that Russia is still his crucial partner in Opec+. Since 2016, they have been the expanded oil producers’ group leaders.
Moscow could, however, be exempted from its output target in the event of a substantial decline in its production. In the past, Opec+ exempted both Iran and Libya from marks if sanctions or war prevented them from producing.
Sergei Lavrov, Russia’s foreign minister, is visiting Riyadh on Wednesday. He will meet with his Saudi- and UAE counterparts. Although the oil exporters saw their output drop sharply in April 2020, they have been adding some production each month. They renewed their agreement to continue cooperation in Opec+.
“Even if Saudi-US relations move toward rapprochement,” said Amrita Sen at Energy Aspects.
