The US and Saudi Arabia have reached a detente after weeks of hostility about high oil prices, with the OPEC+ cartel announcing a production hike even as the new Covid variant threatens demand.
The group led by Saudi Arabia and Russia surprised markets by agreeing to add 400,000 barrels a day of oil from January, even as the virus undermines prices for oil-producing nations. It left the door open to changing its mind, however, saying ministers could gather again at any moment to review the decision if conditions change.
After weeks of diplomatic tension between Saudi Arabia and the US — with President Joe Biden calling for more oil to ease pump prices and OPEC pushing back — a truce has emerged. US officials have been in the Gulf this week, and the result of their talks has been a game-changer that goes beyond oil policy, according to a person familiar with the meetings. Neither side said what concessions each had extracted.
The US delegation included Amos Hochstein, the top US energy diplomat, and Daleep Singh, deputy national security adviser for international economics. Earlier this week, Hochstein said the two countries had discussed how to “partner to invest in the energy transition and collaborate to build a 21st century clean energy architecture.”
It’s not clear how far beyond energy the diplomatic mission has reached: since taking office, Biden has refused to deal directly with de facto ruler Crown Prince Mohammed bin Salman, and has only spoken to his father King Salman. Beyond oil policy, the two countries’ overlapping interests include Iran, and talks over containing its nuclear ambitions.
Relations had reached a low point as Biden released millions of barrels from the US Strategic Petroleum Reserve last month to push down oil prices after his calls to OPEC to act had gone unheard. With inflation concerns stalking central banks globally, Biden sought to increase the impact of the move by getting other countries on board too, including Japan, India and the UK.
OPEC delegates warned they could respond in kind to bolster prices.
When the new Covid variant emerged last week and helped knocked 20% off the price of oil, the cartel appeared to have another good reason to cut output. But after the talks in the Gulf, a compromise was struck — and it suited Moscow too, which was keen to keep pumping. The cartel agreed to stick to its original plan of gradually increasing supply, but with a get-out clause in case markets take a turn for the worse.
The US welcomed OPEC’s decision, and had a special mention for Saudi Arabia.
“We appreciate the close coordination over the recent weeks with our partners Saudi Arabia, the UAE, and other OPEC+ producers to help address price pressures,” White House spokeswoman Jen Psaki said after the meeting. “Together with our recent coordinated release from the SPR, we believe this should help facilitate the global economic recovery.”
Heading into the meeting, ministers were tight-lipped and delegates emphasised the uncertainty posed by omicron on oil demand. They put off a decision to the last minute, postponing technical meetings to allow for as much new information to come to light before they had to crunch the numbers.
Brent crude, the global oil benchmark, plunged as much as 4.6% on the OPEC+ agreement, but recovered those losses as traders realised the importance of the get-out clause in the deal. Brent ended the day up 2.3% to $70.48 a barrel.
In its communique, OPEC+ said that its meeting remained effectively “in session”, meaning it can change policy without warning ahead of its next gathering, scheduled for Jan. 4. It was such an unusual move that OPEC officials said they couldn’t recall a precedent.
“The OPEC+ communique announcing that the meeting remains ongoing is very important,” said Bob McNally, president of consultant Rapidan Energy Group and a former White House official. “It signals they’re poised to pause or cut if conditions warrant.”
Speaking after OPEC+ announced today it would continue with its planned 400,000 barrels per day increase in January 2022, Ann-Louise Hittle, vice president, Macro Oils, at Wood Mackenzie said that ‘in a highly uncertain situation, the best option is to stick with the plan. That is exactly what OPEC+ has done today.
“The group’s members are in regular contact and are monitoring the market situation closely. As a result, they can react swiftly when we start to get a better sense of the scale of the impact the Omicron variant of Covid-19 could have on the global economy and demand,” she added.
The new Omicron variant of Covid-19 could cost the global oil market as much as 2.9 million barrels per day (bpd) of demand in the first quarter of 2022, bringing total expected demand down from 98.6 million bpd to 95.7 million bpd, if it triggers more lockdowns or restrictions, Rystad Energy projects.
If the variant spreads rapidly, causing a rise in Covid cases and the reintroduction of lockdowns, Rystad Energy predicts that oil demand could fall from an expected 99.1 million bpd to 97.8 million bpd in December 2021 alone – a drop of 1.3 million bpd. Demand could tumble further in January 2022, shedding 4.2 million bpd to a level of 94.2 million bpd.
As countries and governments learn to live with Omicron, or vaccine manufacturers adapt existing shots to counter the variant, the full-year impact will likely be less severe. Average 2022 demand would fall to 98 million bpd, a drop of 2.1 million bpd against Rystad’s current base case – or “mean” – scenario.