By Barani Krishnan
Investing.com -- Crude prices returned to the green on Thursday after a two-day slide but remained well below their recent highs amid reports that President Joe Biden might meet Saudi Arabia’s crown prince after all in a diplomatic turnaround that could ostensibly compel the key oil producer to consider U.S. requests for more supply.
New York-traded West Texas Intermediate, or WTI, crude settled up $2.62, or 2.4%, at $112.21 a barrel.
The U.S. crude benchmark lost 4% over two prior days after rising a cumulative 14.5% in four sessions before that enabled it to hit a seven-week high of $114.90.
London-traded Brent settled up $2.93, or 2.7%, at $112.04 a barrel. The global crude benchmark lost 4.5% in two prior days of trading after rising about 12% in four sessions before that, hitting a one-month high of $114.79.
Thursday’s rebound in oil came on the back of hopes that planned easing of Covid restrictions in Shanghai could improve fuel demand in China, the world’s largest importer of oil.
Bullish consumption and stockpiles data on U.S. oil released by the government on Wednesday also helped the market find support, said traders.
Even so, WTI fell to an intraday low of $103.25 earlier while Brent touched a session bottom of $105.72.
One reason for that was the continued uncertainty on whether Europe would reach consensus as a bloc to ban Russian oil to validate the E.U. disapproval over Moscow’s war in the Ukraine.
The other was the CNN report that US officials were working to set up the personal meeting, probably in Riyadh, between Biden and Saudi Crown Prince Mohammed bin Salman on the next scheduled overseas tour of the president.
As long-term allies on everything from energy security to peace on the Arabian peninsula, the U.S. and Saudi leadership should have no trouble meeting at any time, as exemplified by Biden’s predecessor Donald Trump whom some say had “too cosy” a relationship with Salman.
The trouble though is the caustic relationship between Biden and the crown prince, whom the president once called a "pariah”. That came after the 2018 slaying of Jamal Khashoggi, the Saudi-born journalist and US resident whom the CIA says was executed on Salman’s order due to his criticism of the crown prince.
Earlier this year, Salman, often referred to as MbS, his initials, declined to take calls from Biden. Media reports say the crown prince, known for temperamental outbursts, typically explodes when any attempt is made to tie him to the Khashoggi killing. It is not known whether Biden will be able to leave the murdered Saudi-native-turned-U.S.-resident out of any communications with the crown prince.
An improvement in the relationship between the two men might alter the dynamics of the supply-strained oil market, if Saudi Arabia, which has spare capacity to produce more, decides to meet the long-running U.S. request for more barrels.
“It’s too early to put any form of speculation on where this thing could go, with the two sides having to agree first on a meeting; then the timing of when exactly that would be; how the whole thing would come off and whether the Saudis are willing to put a cap on price hikes by releasing more barrels to the market,” said John Kilduff, partner at New York energy hedge fund Again Capital.
“But as traders, we always look to front-run any development on the market, and this, if it comes to fruition, could easily mean about $10 lower on the flat price of crude, with all other things being equal,” added Kilduff, who has a forecast of $95 lows for WTI in the coming weeks on signs that U.S. production was rising after all to meet current supply tightness and the projected peak summer demand for oil.
For more than a year now, Saudi Arabia, which heads the 23-state global oil exporters alliance OPEC+, has ensured that the countries in the group provide less crude than needed by the market in order to maintain optimum prices for a barrel.
The 23-state OPEC+, comprising the original 13 nations led by the Riyadh-led Organization of the Petroleum Exporting Countries and another 10 countries steered by Russia, have stuck to monthly increases of just above 430,000 barrels per day. That falls clearly short of demand that is at least 3 million barrels higher, as a direct consequence of the West’s sanctions on Russia that have de-legitimized an equal number of barrels that used to be on the market.
The United States, meanwhile, is experiencing a severe squeeze in the supply of gasoline, and particularly diesel, from the closure and downsizing of several refineries during the coronavirus pandemic.
Refineries that have stayed in the business are now providing only what they can — or, more accurately, what they desire — without putting any of the money into expanding existing capacity or acquiring the idled plants that can be reopened to provide some measurable relief to consumers. One motivation for the refineries to do that: record profits from the current situation that may be diluted in an expansion. The other is the long turn-around time for any new refinery to deliver a profit.
Bloomberg estimates that more than 1.0 million barrels per day of U.S. oil refining capacity — or about 5% overall — has shut since the Covid-19 outbreak initially decimated demand for oil in 2020. Outside of the United States, capacity has shrunk by 2.13 million additional barrels a day, energy consultancy Turner, Mason & Co says. The bottom line: With no expansion plans on the horizon, the squeeze is only going to worsen.
Saudi Energy Minister Abdulaziz bin Salman last week downplayed any connection between the record high fuel prices in the United States with OPEC+’s actions, saying the lack of refineries was to blame.
“There is no refining capacity commensurate with the current demand and the expectation of the demand in the summer,” the energy minister and half-brother to the Saudi crown prince said.
Bahrain’s Oil Minister Sheikh Mohammed Bin Khalifa Bin Ahmed made a similar observation as his Saudi counterpart. “There’s no new [refining] capacity coming,” Sheikh Mohammed said. “Even if you produce more crude, there isn’t demand for it, there aren’t any more refineries.”