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Saudi- U.S. Relations Sour Further On Huge OPEC+ Surprise Cut

Yves here. This is a useful and compact recap of why and how quickly the Saudis have cooled on the US and why the US is no longer in a position to do much about it. You might consider circulating it to friends and family who are not up to speed on this development. Watkins is not an anti-globalist and is clearly describing waning US power.

One aspect Watkins chose to omit was the Biden Administration’s open hostility to Mohammed bin Salman. Mind you, the US intel state had never been keen about him, since he was not expected to come out on top of the 2017 succession struggle and the US preferred all other candidate to him. The butchering of Jamal Khashoggi didn’t help, but it was Biden, almost as soon as he took office, that made clear the US would implement a “relationship downgrade” of Saudi Arabia over MbS’s intransigence.

And now US is upset at what it set in motion. It appeared not to have occurred to them that the Kingdom had options and could and would find other allies.

From CNBC, mid-February 2021, Biden’s snub of Saudi Crown Prince Mohammed bin Salman is a ‘warning’ signaling a relationship downgrade:

President Joe Biden’s press secretary delivered a striking message to Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman, this week. Jen Psaki told a news conference, using diplomatic language, that the U.S.-Saudi relationship — particularly that with the kingdom’s crown prince — is being downgraded.

“On Saudi Arabia I would say we’ve made clear from the beginning that we are going to recalibrate our relationship with Saudi Arabia,” Psaki said Tuesday from the White House….

The quotes drew instant attention from regional analysts and foreign policy experts, and likely leaders in the Gulf as well, as a blatant snub of Saudi Arabia’s 35-year-old heir to the monarchy and arguably the most powerful man in the region….

The snub to MBS represents a warning to Saudi Arabia,” Torbjorn Soltvedt, principal MENA analyst at Verisk Maplecroft, wrote in an email note Wednesday, referring to the crown prince by his initials. “It will be seen as a disapproval of MBS’s leadership which has been characterized by unpredictable decision-making and a much less consultative approach than in the past.”

And the administration’s apparent intention to sideline the crown prince represents a dramatic departure from the Trump White House, which made Saudi Arabia the former president’s first overseas visit, signed major arms deals with the kingdom in defiance of congressional opposition, and refrained from criticizing the kingdom over its human rights violations.

This shouldn’t come as a huge surprise, since Biden early on promised a harder line on the oil-rich Islamic monarchy. During a primary debate in early 2020, Biden pledged to make Saudi Arabia “the pariah that they are.”

And now the Administration is upset that the Saudis got their message and were not cowed. Lordie.

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai. Originally published at OilPrice

  • Optimism over a possible rapprochement between Saudi Arabia and the U.S. is fading.
  • The large unexpected production cut yet another sign that Saudi Arabia is moving closer to Russia.
  • Both Saudi Arabia and Russia need Brent crude prices well above $80 per barrel.
  • The surprise huge new cut in oil production from ‘OPEC+’ – the Saudi Arabia-led OPEC group of countries ‘plus’ Russia – highlights that any optimism over a possible rapprochement between Saudi Arabia and its previous key superpower ally, the U.S., is ill-founded. Instead, newly emboldened by the Beijing-brokered Saudi Arabia-Iran deal to resume relations, followed by the approval of a plan to join the Shanghai Cooperation Organisation (SCO) as a ‘dialogue partner’, Saudi Arabia has now decisively shifted into the China-Russia sphere of influence. Prior to the surprise additional oil production cut by OPEC+ announced on 2 April, early February had seen Saudi Arabia lead its OPEC fellow members and OPEC+ into sticking with its previously agreed oil production cuts quota of 2 million barrels per day (bpd). This cut represented only around 2 percent of the recent historical mean average of supply in the global oil market. Additionally, it left oil prices at levels that barely helped Saudi Arabia in budgetary terms at all, with a fiscal breakeven oil price forecast of US$78 pb of Brent in 2023, compared to over US$80 pb of Brent in the previous year. Significantly as well, oil prices at that point in February were way below the level that Russia wants, with a fiscal breakeven oil price of US$114 pb of Brent this year, up from around US$64 pb before its invasion of Ukraine. It was thought then by several oil market observers that the oil production in February by OPEC+ might have been a sign that Saudi Arabia was open to thawing out frozen relations with the U.S.

    What changed between February and April was the Saudi Arabia-Iran resumption of relationship deal, brokered by China. Although at the time of the announcement of the deal, White House national security spokesperson, John Kirby, tersely observed that the deal done on 10 March between Iran and Saudi Arabia to re-establish relations “is not about China”, it absolutely was about China. What it absolutely was not about was the U.S. The biggest diplomatic coup in the Middle East since at least the signing of the Joint Comprehensive Plan of Action (JCPOA) between the P5+1 powers and Iran in 2015 had been brokered by China, without any involvement at all from the U.S., and every country in the world and in the Middle East knew it. The landmark deal between the two longstanding arch-regional enemies – Shia Iran and Sunni Saudi Arabia – was just the sort of far-reaching geopolitical coup that the U.S. had wanted to achieve in its ‘relationship normalisation deals’ program that had followed its unilateral withdrawal from the JCPOA in May 2018, as analysed in depth in my latest book on the global oil markets. In short, at that point more than any other of the major advances that the China-Russia axis has made in the Middle East, it was clear that this axis was winning the superpower battle for the Middle East and not the U.S. and its allies.

    Saudi Arabia and Russia know perfectly well that the U.S. and its major allies do not want oil prices over US$80 pb of Brent. For the U.S. and its allies, sustained oil prices above that level, and corollary rising gas prices, mean that inflation will remain higher for longer, which will keep interest rates higher for longer, which increases the threat of severe economic damage to net importers of either. For the U.S. these fears have very specific ramifications: one economic and one political, as also analysed in depth in my latest book on the global oil markets. The economic one is that historically every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost and the U.S. economy suffers. The political one is that, according to statistics from the U.S.’s National Bureau of Economic Research, since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. This is not a position sitting President Joe Biden, or the Democratic Party, wants to be in one year out from the next U.S. election.

    The U.S., since the end of the Second Oil Price War that ran from 2014-2016 – instigated by Saudi Arabia with the specific intention of destroying or disabling the threat from the then-nascent U.S. shale oil sector – has wanted oil prices in a Brent price range from US$40-45 pb on the floor to US$75-80 pb on the ceiling, as also analysed in depth in my latest book on the global oil markets. This ‘Trump Oil Price Range’ was set at the lower end to reflect the price at which most U.S. shale oil producers could breakeven and begin to make a decent profit at that stage (US$40-45 pb) and at the higher end to reflect the price at which the inflation/interest rate mix might begin to threaten the U.S. economy. For many years before the Second Oil Price War, Saudi Arabia’s budget breakeven Brent oil price was about US$80 pb and for many years after the War it was well over US$84 pb.

    Given these economic and political necessities in the U.S. and its allies, former President, Donald Trump, rigorously enforced the price range. When Saudi Arabia (with the help of Russia) was pushing oil prices up over the US$80 pb of Brent level in the second half of 2018, President Trump sent a clear warning to Riyadh to stop doing this. In a speech before the United Nations General Assembly, Trump said: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it.” He added: “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” As the Saudi Arabian- and Russian-led OPEC+ oil production cut agreement continued to push oil prices up in September 2018 to slightly over the ‘Trump Cap’, Trump made the same warning again, even more clearly at a rally in Southaven, Mississippi, in October 2018. He said: “And I love the king, King Salman, but I said, ‘King we’re protecting you. You might not be there for two weeks without us.’” In short, during Trump’s entire presidency, the ‘Trump Oil Price Range’ was breached only once for a period of around three weeks (toward the end of September 2018 to the middle of that October).

    Saudi Arabia’s malleability at that point to Trump’s (and the U.S.’s) wishes for the oil price was due in very large part to the fact that it was still heavily reliant on the U.S.’s protection, principally from its main regional threat, Iran. At that stage, the U.S. and its allies could offer protection to Saudi Arabia from Iran through several methods. One was monitoring, as laid down in the Joint Comprehensive Plan of Action between the P5+1 group of nations (U.S., U.K., France, China, and Russia, ‘plus’ Germany) and Iran. Another method was U.S. and allied forces on the ground across the Middle East.

    This leverage over Saudi Arabia ended, firstly with the U.S.’s unilateral withdrawal from the JCPOA and secondly with the Iran-backed Houthi attacks on Saudi Arabia’s key oil facilities in September 2019). Saudi Arabia was not then reassured either by the U.S.’s withdrawal from Syria (in 2019), Afghanistan (2021), and Iraq (2021). It was obvious to Saudi Arabia from the Iran-backed Houthi attacks on its oil facilities in September 2019 that it could not rely on the U.S. and its allies for its protection and alighted instead on Russia and China. Russia had already helped Saudi Arabia out by supporting it from the end of 2016 in the newly formed OPEC+ grouping, which was instrumental in allowing Saudi Arabia to rebuild its finances after the Second Oil Price War. China had made a face-saving offer to Saudi Arabia’s Crown Prince Mohammed bin Salman that he had never forgotten, as also analysed in depth in my latest book on the global oil markets. It is little wonder then that Saudi Arabia now holds the U.S. and its allies in such contempt that he refused even to take a telephone call from President Biden just after Russia had invaded Ukraine in which the President wanted to ask for Saudi Arabia’s help to bring oil prices back down.

Rayna Prime

Rayna Prime

Rayna Prime Editor