By now, the speculations are high on the outcome of the OPEC+ alliance’s meeting on Aug. 3.
The widespread belief now is that the alliance will raise production by more than planned on the back of US President Joe Biden’s visit to Saudi Arabia and his call for oil producers to increase production to lower oil prices.
I think this meeting will be an ordinary meeting for the OPEC+ ministers and their allies. Therefore, no surprises are expected from the Kingdom, the only country in OPEC+ with the spare capacity today to calm down prices.
The reasons for this are as follows:
First, OPEC+ is not in the mood to raise production.
Biden visited the Kingdom last month hoping to strike a deal to open the taps, but he is set to be disappointed, OPEC+ sources have told Reuters.
The news agency is reporting that the group will consider keeping oil output unchanged for September, saying a modest increase would be discussed.
Second, the Kingdom will not make any incremental increases in output outside of OPEC+.
Speaking at an Arab News Japan roundtable on July 19, the Kingdom’s Foreign Minister Prince Faisal bin Farhan described dialogue in the alliance as “quite robust” and that it is “responding as needed to the requirements of the oil markets.”
He emphasized that the Kingdom would not act alone and will coordinate with other producers in the alliance, including Russia.
Third, the Kingdom — and most of OPEC+ — does not see supply shortage as the issue behind high oil prices.
“We don’t see a lack of oil in the market; there is a lack of refining capacity,” the Saudi foreign minister added in the same roundtable.
This limits the possibility that the Kingdom will increase oil production in September if it sees the root cause for the high oil prices is the inability of consumers to process more oil.
Fourth, if the Kingdom wants to encourage more customer demand, it must consider cutting monthly official selling prices.
However, the OSPs for September are expected to rise, according to a survey by Bloomberg that included refiners and traders. At least those in Asia are expecting Saudi Aramco to raise its OSPs to them.
Fifth, the market situation is still unclear when it comes to demand.
The oil price structure is still in backwardation, which means that the market is expecting shortages in the short term but surpluses in the long term.
This situation indicates that the market does not see enough demand by the end of the year to consume the increases in supply.
It makes sense to consider the prospects of a recession due to high inflation and high interest rates.
If we look carefully, the market suffers from geopolitical factors and other structural issues.
It is not an issue of demand and supply alone.
If there are not enough investments in oil production and refining, and there is an ongoing war that resulted in the boycott of Russian supplies, then OPEC+ has limited tools to fix the problems.
It would be highly logical for the alliance to move with caution and not make big moves and promises when no one can predict when a recession will kill the demand or how many Russian oil barrels would not be lifted due to the sanctions.
I guess we can all see the writing on the wall unless OPEC+ makes a surprise, which is very unlikely.
• Wael Mahdi is a senior business editor at Arab News and co-author of “OPEC in a Shale Oil World: Where to Next?”
Twitter: @waelmahdi
