Brent’s rise to $103 is entirely rational on short covering, the Friday rally in risk assets and the absence of any firm commitment by Saudi Arabia, Kuwait and UAE, to boost output during President Biden’s state visit to the kingdom. Apparently, the Jerusalem Declaration and fist pump diplomacy have not been sufficient to reset relations between the Biden White House and MBS. This rally is tactical and the underlying trend for black gold has to be bearish as long as King Dollar flirts with 20 year highs, industrial metals are in long liquidation, demand destruction in US gasoline and Chinese petroleum products continues amid a global economic slowdown.
Biden’s trip to the Middle East had a clear domestic motivation to boost his pro-Israel credentials ahead of the November elections and assist the Federal Reserve by applying pressure on American allies in the Gulf to lower oil prices. While the timing priorities may differ, Washington and Riyad share a common national security interest in a strong deterrence policy towards Iran and the need to lower oil prices as inflation and a sovereign debt crisis wreck havoc on Europe/EM.
Since the existing quota system ends in September, the August 3rd OPEC+ meeting has global significance for the crude oil market. It is possible that the Gulf oil states will announce a rise in supplies at the OPEC meeting in order not to jeopardise relations with Washington. Despite the dramatic fall in both Brent and WTI since early June, the energy futures market still remains in backwardation. The uptick in Libyan crude after the Prime Minister of the Tripoli government reshuffled the C-suite at NOC is also a bullish metric as crude is a bid higher in Singapore trading.
Inflation at 40 year highs is a political nightmare for Joe Biden, as it was for Jimmy Carter’s doomed re-election bid in November 1980. Biden’s domestic agenda has failed on every front and his foreign policy legacy may well be defined by his decision to abandon America’s allies in Afghanistan in 2021, even though he has played a stellar role in coordinating NATO’s response to the Russian invasion of Ukraine.
Gas prices have fallen 50 cents at the pump in June but remain far too high at $4.5 per gallon and it is ominous that the Powell Fed is tightening into a slowing economy. It is likely that the Biden White House will increasingly adopt a more anti-Saudi, anti-Putin and anti-Big Oil rhetoric if there is a significant snap back in crude this summer.
Saudi Arabia now produces 11 MBD or almost 10% of global output. Its spare capacity to increase exports amid the spike in local air-conditioning demand during the summer heat is lot less than what Biden’s energy team assumes. The disruption in wet barrel tanker flows caused by the EU’s embargo on insurance for Russian oil and the vast dislocations caused by the anti-Kremlin sanctions are a sword of Damocles over a tight global oil market. Ed Morse’s call for $65 Brent is all too real.
Also published on Medium.
