Saudi Arabia has made clear to Western allies that it is ready to increase oil production if Russia’s production drops significantly under the weight of sanctions, according to five people familiar with the discussions.
The kingdom has resisted calls from the White House to speed up production increases despite oil prices Trading near $120 a barrel, the highest level in a decade, arguing that the energy crisis could get worse this year. Saudi Arabia believes it needs to keep spare production capacity in reserve.
But fears of an outright supply shortage escalated after the European Union launched another round of sanctions against Moscow, including a ban on seaborne shipments of Russian oil to the bloc.
The European Union also agreed to a deal with the United Kingdom for Ship insurance ban The Russian oil will be moved later this year, in a move analysts said will likely severely limit Moscow’s ability to redirect oil to other regions.
“Saudi Arabia is aware of the risks and it is not in their interest to lose control of oil prices,” said one person familiar with the kingdom’s thinking.
Saudi Arabia’s view is that while oil market Undoubtedly tight, which fueled higher prices, there is no real shortage yet, according to diplomats and industry sources familiar with the discussions, which came ahead of a monthly meeting of the OPEC+ alliance of oil producers on Thursday.
But that could change as the global economy recovers from Covid-19, including the reopening of major cities in China, boosting demand, while the possibility of Russian oil production falling dramatically has increased. Russia was producing more than 10 percent of the world’s crude before its production Invasion of Ukraine.
There have been tensions between the United States and the Saudi leadership, including with Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler. Saudi Arabia has repeatedly rejected calls from the White House and the Group of Seven to immediately accelerate production increases.
But several visits in recent weeks from a high-ranking US delegation, including Brett McGurk, the White House coordinator for Middle East policy, and White House energy envoy Amos Hochstein, have helped improve the relationship, according to a person familiar with the diplomacy.
People familiar with the talks said Saudi Arabia agreed to a change of tone to try to cool prices as part of a rapprochement with the Joe Biden administration. It also provided assurances that it would eventually respond by increasing production in the event of a supply crisis in the oil market.
“Such steps are within the scope of the possible in response to a material positive move by the United States,” said Ali Al-Shihabi, a Saudi commentator familiar with the leadership’s thinking, referring to efforts to calm relations ahead of a possible visit by President Biden in this regard. general.
A diplomatic source said discussions had taken place regarding an immediate increase in production from Saudi Arabia and the UAE, which could be announced at the OPEC+ meeting on Thursday. But nothing has been finalized yet, and OPEC+ can still stick to the production plan that has been in place since the start of the Covid crisis.
The source said production increases scheduled for September would be pushed back to July and August, although the group would have to agree to the change.
Christian Malik, head of oil and gas at JPMorgan, said Saudi Arabia remains “concerned about using all of its spare capacity” because it “believes it needs enough reserves to be able to respond to what may develop in the market.”
“While burning all of their spare capacity now would be premature, they are ready to respond if the market begins to spiral out of control. They view excess capacity as the last line of defense against recession risks from higher oil prices.”
Saudi Energy Minister Prince Abdulaziz bin Salman, half-brother of the crown prince, confirmed that he is still Russia is seen as a crucial partner in the OPEC+ alliance. Countries have led the expanded group of oil producers since 2016.
However, Moscow could be offered an exemption from the production target if its production drops significantly. Both Libya and Iran were previously excluded from the OPEC+ targets when war and sanctions hampered their ability to produce.
Russian Foreign Minister Sergei Lavrov is visiting Riyadh this week and will meet with his Saudi and Emirati counterparts. They reiterated their agreement to continue cooperation in OPEC +. The oil-exporting group cut production sharply in April 2020 but returned some production each month.
“Even as Saudi-US relations move toward rapprochement, the kingdom will not turn its back on Russia,” said Amrita Sen of Energy Aspects, a consultancy.