Drivers have noticed some relief at the pump as oil had dripped lower before Monday's rally in the commodity, but can we attribute any of this to the recent visit by President Joe Biden to Saudi Arabia?
Let's look at the factors really at play.
After the Russian invasion of Ukraine, as Brent spot prices touched highs of $135 a barrel, there has been an undue amount of pressure on the Biden Administration to get the price of oil down. Oil prices have put a strain on consumers as inflation is now averaging close to 9.5% year-over-year in the U.S. The White House may try to blame the "inflation" on Russia and its invasion, but the truth is that inflation was a problem all throughout the end of last year prior to the invasion. The central bank printed about $5 trillion in Covid-related stimulus, causing a demand boost in a short span of time, which then caused supply chain bottlenecks everywhere, which then caused prices to surge across the board. The sheer monetary and fiscal boost to get the U.S. and world economy out of its Covid-related slump resulted in a shock to the system. Prices of all raw materials from lumber, cotton, oil, gas, base metals and other inputs all skyrocketed, the invasion just made it worse.
The problem with President Joe Biden and his team is that they may not fully grasp the extent of the oil market tightness -- it really is not about oil per se, but about products like gasoline and distillate. The things consumers use. Oil is just an input that goes in to making these outputs. But it is these outputs used in the global supply chain that impact consumers' lives. We started the first quarter with a tight product market, given the years of refining capacity that had been idled and a very cold start to the winter that depleted distillates even further. When the Russian invasion came, the direct ban of Russian products caused the situation to become even more dire at a time when demand for these products was surging. That is what made matters worse. But Biden, other than trying to really deal with the matter, was more interested in optics, blaming the Russian war, or Saudi Arabia and the OPEC-led group. The failure of U.S. policies back at home is also one of the main reasons the U.S. is where it is today. The policies have been so aggressive in claiming to move to clean and green energy, without proper reforms put in place to necessitate a smooth transition. They moved to shut down and reduce incentives for fossil and dirty fuels like coal plants, which are now again restarted as they have no choice in need of energy. Europe is a victim of this, but it has its own secular problems.
Since Covid-related shutdowns when oil prices fell down to negative $35/bbl, and OPEC+ took off about 10 million barrels per day of oil out of the market, it is true that they had been a bit slower in releasing all of its oil back onto the market. They did it in dribs and drabs of 400,000 barrels per day every month with only now having fully reached that production about two years after Covid. Can one blame them, given oil is the crown jewel source of revenue for their economy? Demand was uncertain going forward, and they could not afford to see prices collapse, and had to work hard to make sure prices moved to a more stable level.
Commodities are all about timing, at a time when demand was exploding, the supply side could not play catch up fast enough, as even U.S. shale had permanently lost its two million barrels per day. They were not eager to restart given they had had their wrists slapped by their investors during past cycles. Instead, Biden kept lobbying the OPEC+ groups to pump more over the last few months when they themselves could not understand the rise in prices as it was not oil-led. This is something that evaded Biden and his team.
Rather than asking its own U.S. industries to refine more oil, giving incentives for them to do so, and encouraging their U.S. exploration, development and production companies to ramp up production, they kept begging OPEC+ to pump more oil. In the OPEC+ group, it really is just Saudi Arabia and United Arab Emirates that is doing the heavy lifting. Other members suffer, given their regional difficulties in ramping up to meet their quotas. As OPEC+ ramps up to full capacity, there is the issue of its own spare capacity, which they are eager to hold onto in case of other external shocks.
Regardless of this talk of tight supply, prices have still fallen by $35 a barrel -- which has confused all. Commodities are a function of both, demand and supply, and this latest move is a function of the former, not easily capturable until after the fact.
So, during Biden's trip to the Middle East nothing was done for oil, as Saudi Arabia promised to do what it always does, supply the market with what is necessary, keeping relations polite and cordial. It is really not about OPEC or Saudi for now, the issue now is more on the demand side as global economy is collapsing post the Covid-related stimulus surge at a time when all the central banks' cool aid is running out. Growth is stalling a with inflation averaging closer to 8%-10% year over year leaving their hands tied, unable to print more to save the economy. As Manufacturing activity slows down in China, U.S. and Europe, the demand outlook for the second half of the year looks even more uncertain. Inventories today only tell you how tight the balance is today, but they do not tell you what it will be in months to come. We know by the time this shows up in the data, prices will have already moved to reflect that. The rest is just optics.
