Opec's tiny oil supply hike shows its limited powers to help Biden, consumers

Unwilling or unable to significantly boost production, Opec+ ended up offering next to nothing. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - US President Joe Biden returned from Saudi Arabia last month confident that his visit had yielded a promise to cool oil prices. But on Wednesday (Aug 3), Opec+ offered only a token supply increase and signalled that its powers to help are limited.

The "further steps" from the Saudis on oil production the White House had predicted after Mr Biden's reconciliatory fist bump with Crown Prince Mohammad bin Salman turned out to be one of the smallest hikes in Opec's six-decade history - 100,000 barrels a day extra in September from the group and its allies.

Such a small amount, just 1/1000th of global demand, offers little respite for consumers suffering the inflationary squeeze of oil prices and scant reward for the President's diplomatic efforts.

Analysts said the increase was equal to only 86 seconds of global oil demand.

Explaining their rationale after their meeting, the Organisation of Petroleum Exporting Countries and its allies highlighted a fundamental problem that explains why crude remains near US$100 a barrel in London.

Idle supplies in the Middle East are down to "razor-thin" levels of about two million barrels a day, or 2 per cent of world demand, according to the International Energy Agency. This "severely limited" spare production capacity should be used only with "great caution in response to severe supply disruptions", Opec+ said in a statement.

Unwilling or unable to significantly boost production, Opec+ ended up offering next to nothing.

"Today's decision will feed the narrative that there is little left in the Opec+ tank," said RBC Capital Markets chief strategist Helima Croft.

Falling prices

Biden administration officials said they were satisfied with the decision for September because Opec+ already fast-tracked supply increases in July and August. The Saudis pumped 10.78 million barrels a day last month, according to a Bloomberg survey, a level reached only on rare occasions.

"At the end of the day, we are not looking at numbers of barrels," Mr Amos Hochstein, the State Department's senior adviser for global energy security, said in an interview in Washington. "We are looking at: Are oil prices coming down from their highs?"

After initially rising on the Opec+ decision, benchmark prices on Wednesday dropped after US data showed an unseasonable drop in petrol demand. US West Texas Intermediate crude fell 4 per cent to US$90.66 per barrel, while Brent crude was down 3.7 per cent at US$96.78.

Refraining from a significant oil supply boost may also have served other interests of Opec+, particularly its desire to preserve ties with Moscow. Before the meeting, delegates privately said they saw no need to compensate for sanctions on Russia, arguing that the country's exports have remained robust despite measures targeting them.

After the meeting, Russian Deputy Prime Minister Alexander Novak told state Rossiya 24 TV that there are "uncertainties on the market that need to be taken into account", such as new Covid-19 strains and restrictions on Russian petroleum sales. "Therefore, such cautious decisions are taken today."

Political failure

Critics of the Biden administration were unconvinced that the White House could claim any success from its efforts to boost oil production.

"President Biden went halfway around the world to beg a country he once deemed a 'pariah' for more energy," said Senator Kevin Cramer, a Republican from North Dakota. That was an "insult" because "we can produce more at home if he and his administration got out of the way", he said.

Mr Biden's visit to Saudi Arabia was a significant policy reversal. The President had vowed to punish the kingdom for the 2018 killing of columnist Jamal Khashoggi, but with the disruption to energy supplies from Russia's invasion of Ukraine, the importance of the decades-old partnership with Riyadh had re-emerged. Late on Tuesday, the United States approved the sale of US$3.05 billion (S$4.2 billion) of weapons including Patriot missiles to the Middle East heavyweight.

"It is hard to overstate how disappointing this Opec+ decision is for the Biden administration," said Mr Isaac Boltansky, Washington-based director of policy research at brokerage BTIG. "Frankly, it is the geopolitical equivalent of a slap in the face."

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