The oil market is not only looking at Biden’s visit to Saudi Arabia
US president Biden’s visit to Riyadh has ended successfully on all fronts, with various agreements signed and sealed.
As a general impression in the market, Saudis seem to have come out of the visit more successful, and established the forward vision for the Kingdom’s future international role.
The Crown Prince Mohammed bin Salman also proved to be a unique leader.
Saudi Arabia and the US signed 18 investment agreements in sectors including energy, aerospace, defense, textiles, manufacturing, education and tourism.
The agreements built upon the long-standing economic relationship between the two countries and demonstrated a sustained US confidence in investment opportunities with the kingdom.
US investments in Saudi Arabia continued to grow over the recent years, with 743 companies present in the kingdom and nearly 70,000 Saudis employed by US companies.
Other agreements included a partnership between the Ministry of Investment and Boeing in areas related to aircraft manufacturing, as well as an agreement between the investment holding company Ajlan & Bros and US smart energy firm SolarEdge to explore renewable energy projects.
According to some media reports Saudi Arabia also promised during the visit to increase oil production over the coming period in coordination with OPEC Plus. Clarity on this issue may materialize during their upcoming meeting on August 3. Saudi Foreign Minister said oil production was not discussed at the Jeddah summit.
Oil market reaction
The energy markets may perceive Biden’s visit positively in which case, prices could ease marginally on Monday. Any signal for more crude supply in the market will determine price behavior.
If this occurs, it will certainly also help gasoline prices in the US to ease in collaboration with increasing runs, as there is a general belief that spare capacity is limited.
Oil prices have settled below $100 per barrel, following a large sell-off which reflected the growing concerns over oil fundamentals both for higher supply and weaker demand.
Oil futures prices averaged lower due to concerns about a global economic slowdown and declining equity markets.
Rising COVID-19 cases in China, a higher-than-expected US inflation reaching 9.1 percent in June, and EIA data showing a large build in commercial crude and oil production stocks last week, all added to the downward pressure on prices.
Traders also focused on the sharp decline of US seasonal demand for gasoline. Refinery margins fell due to signs of recovery in gasoil balance in line with rising refinery output, while economic concerns on product demand further contributed to weaker gasoil prices and crack spreads.
The biggest wild card remains Russia
However, the key uncertainty facing the oil market is the developments in Russian trade flows. In 2021, Russia’s crude exports averaged around 4.4 million barrels per day, out of which about 2.7 million barrels per day headed to Europe.
After the implementation of sanctions in response to the conflict in Ukraine, Russia faced the challenge of pushing its crude flows away from European destinations to new buyers in Asia.
Since EU sanctions have focused on banning seaborne crude flows, as pipeline trade is more difficult to replace, flows to Europe remained relatively stable at around 0.8 million barrels per day.
Russia’s total maritime crude exports have increased from a low of 3.1 million barrels per day in February, peaking at 3.8 million barrels per day in April and then declining to 3.5 million barrels per day in June. Meanwhile, exports to India, China and Turkey have increased.
It remains to be seen whether the decline in Russian exports since April will continue or will stabilize, as increased flows to Asia offset sanction-driven declines in Europe.
Industry analysts still expect Russian production to fall by about 2 million barrels per day, by the end of this year, with declines occurring primarily in the fourth quarter of 2022.
While tougher western sanctions against Russia would cause production to start falling from their current levels toward the end of the year, so far, Russian output is bucking expectations and exports have increased since February.
The US and EU could waive their ban on shipping insurance and financial services for Russia if key global oil importers back proposals for an international cap on Russian oil prices.
Other fundamental factors are also playing a role
On the global aviation front, a strong activity amid lower middle distillate inventories in Singapore should provide near term support to the markets.
Latest economic indicators point to ongoing soft US growth in the second quarter to this year, while inflation remains high. This will likely support continued monetary tightening, possibly dampening effects on oil demand.
The time structure across the forward curve has sold off heavily over the past few weeks, with market sentiment now focused on fears of a global recession rather than on supply concerns.
Overall, the worst-case scenario of an economic recession would lead to a loss of 2 million barrels per day demand over the next 12 months, with most of that decline to be seen in the first half of 2023. There is however a considerable upside potential to prices later this year, if Russia holds back or even halts natural gas supplies to Europe.