Oil prices took a significant hit this week, plummeting nearly 9%-the worst weekly performance in six months. Is Saudi Arabia the main culprit behind this decline?
On October 6, reports emerged that Saudi Arabia had expressed intentions to the U.S. White House about increasing its oil output. The kingdom's move is reportedly in hopes of establishing a "U.S.-Saudi Joint Defense Agreement." Saudi Arabia stated that any action regarding oil production would depend on market conditions and expressed willingness to act by early 2024 if prices remain high.
The reports suggest that this is part of an effort to establish a tripartite agreement. The Biden administration hopes to facilitate the restoration of diplomatic relations between Saudi Arabia and Israel within the next six months. In exchange, the U.S. would provide security guarantees and assist Saudi Arabia with civilian nuclear technology.
While the three parties have broadly agreed on the outline of the agreement, discussions on the details have been challenging. The White House needs to secure support from Congress. Analysts believe the White House aims to align Saudi Arabia with U.S. political interests ahead of next year's elections.
Nevertheless, Saudi negotiators emphasized that oil production plans would be adjusted based on market conditions. Officials familiar with the negotiations stated that the discussions don't necessarily indicate a long-term price reduction agreement.
After a brief surge on Tuesday, international oil prices began a continuous decline on Wednesday. Despite a slight increase on Friday, prices dropped nearly 9% over the week, marking the worst weekly performance in half a year. Last week, Brent crude oil prices had approached the $100 mark.
By Friday's close, WTI crude oil futures for November rose by $0.48, an increase of 0.58%, closing at $82.79 per barrel, with a cumulative weekly decline of 8.81%. Brent crude oil futures for December rose by $0.51, an increase of 0.60%, closing at $84.58 per barrel, with a weekly decline of over 8.26%.
Meanwhile, oil prices had been on the rise for four consecutive months until September, providing hedge funds with an opportune moment to cash out. Traders are now focusing on the rising U.S. bond yields and the potential economic threats they pose. Speculative long positions in September's oil helped push prices above the $90 mark, setting the stage for profit-taking during the recent price volatility.
The U.S.-Saudi "Game"
Analysts point out that as the world's largest oil exporter, Saudi Arabia undoubtedly has the power to influence oil prices, either by limiting or increasing production. During global tumultuous times, Saudi Arabia has used this capability to "pacify" the market. However, Saudi Arabia's oil policy has now shifted to "Saudi First," with the kingdom hoping that oil can fund its economic diversification.
Since mid-June, both Russia and Saudi Arabia have been voluntarily reducing production beyond the requirements of the OPEC+ agreement. Since July, Saudi Arabia has further reduced its daily oil output by 1 million barrels, pushing Brent oil prices up by 25% to over $95 per barrel.
The sharp rise in oil prices presents another challenge for the U.S. government in its fight against inflation. Analysts believe that the perception of living costs in the current economy is highly correlated with energy and food prices for ordinary consumers. If a rebound in oil prices leads to rising inflation expectations, the Federal Reserve might continue to raise interest rates.
Reports state that at the end of September, two senior White House officials, Brett McGurk and Amos Hochstein, flew to Saudi Arabia to continue negotiations on a potential large-scale security agreement. They emphasized that soaring oil prices might hinder the White House's efforts to gain Congressional support.
Analysts believe the White House's move aims to align Saudi Arabia with U.S. political interests ahead of next year's elections. Given the difficulty of getting the agreement approved in the U.S. Congress, the U.S. government plans to package the deal with Saudi Arabia as a normalization agreement with Israel to reduce resistance in Congress. Even so, the likelihood of the agreement passing in the short term is considered low.
Analysts think that the news of the "unprecedented" U.S.-Saudi agreement negotiations is interpreted by the market as an improvement in U.S.-Saudi relations. If the agreement is finalized, the future joint production cuts by Saudi Arabia and Russia will face significant uncertainty. The current Saudi policy of "artificially creating" market shortages might change in the future.
