Saudi Arabia has indicated to western allies that it is prepared to raise oil production should Russia’s output fall substantially under the weight of sanctions, according to five people familiar with the discussions.
The kingdom has resisted calls from the White House to accelerate production increases despite oil prices trading near $120 a barrel, the highest level in a decade, arguing that the energy crunch could get significantly worse this year. Saudi Arabia believes it needs to keep spare production capacity in reserve.
But fears of outright supply shortages have risen after the EU launched another round of sanctions against Moscow, including a ban on importing seaborne cargoes of Russian oil into the bloc.
The EU has also agreed a deal with the UK to bar the insurance of ships carrying Russian oil later this year, a move analysts said was likely to severely curtail Moscow’s ability to redirect oil to other regions.
“Saudi Arabia is aware of the risks and that it is not in their interests to lose control of oil prices,” said one person briefed on the kingdom’s thinking.
Oil prices fell on Thursday, dropping to a low of $112.80 a barrel in early trading from $116.29 at the close on Wednesday. Prices hit a two-month high above $120 a barrel this week.
Saudi Arabia’s view is that while the oil market is undoubtedly tight, which has buoyed the rise in prices, there are not yet genuine shortages, according to diplomats and industry sources briefed on the discussions, which came ahead of a monthly meeting of the Opec+ oil producer alliance on Thursday.
But that could change as the global economic recovery from Covid-19, including the reopening of major cities in China, boosts demand, while the likelihood of Russia’s oil output declining substantially has increased. Russia was producing more than 10 per cent of global crude before its invasion of Ukraine.
There have been tensions between the US and the Saudi leadership, including with Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler. Saudi Arabia has repeatedly rejected calls from the White House and the G7 to accelerate production increases immediately.
But several visits in recent weeks from a high-level US delegation, including Brett McGurk, White House co-ordinator for Middle East policy, and Amos Hochstein, White House energy envoy, have helped improve the relationship, according to a person familiar with the diplomacy.
People familiar with the talks said Saudi Arabia had agreed to a shift in tone to try to calm prices as part of a rapprochement with Joe Biden’s administration. It has also offered reassurances that it would eventually respond by raising production should a supply crunch hit the oil market.
“Such steps are in the realm of the possible in response to materially positive movement on the US side,” said Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, referring to efforts to smooth relations ahead of a possible visit by President Biden this year.
One diplomatic source said there had been discussions about an immediate increase in production from Saudi Arabia and the United Arab Emirates, which could be announced at Thursday’s Opec+ meeting. But nothing has yet been finalised, and Opec+ could still stick with its production plan that has been in place since the beginning of the Covid crisis.
Production increases scheduled for September would be brought forward to July and August, the source said, although the group would have to approve the change.
Christyan Malek, global head of energy strategy at JPMorgan, said Saudi Arabia was still “wary of using up all its spare capacity” as “it believes it needs enough in reserve to be able to respond to what may well develop in the market”.
“While burning through all its spare capacity now would be premature, they are willing to respond if the market starts to get out of control. They view spare capacity as the last line of defence against the recessionary risk of oil spiralling higher.”
Saudi Arabia’s energy minister Prince Abdulaziz bin Salman, the half-brother of the crown prince, has emphasised that he still views Russia as a critical partner in the Opec+ alliance. The countries have led the expanded oil producers group since 2016.
However, Moscow could be offered an exemption from its output target should its production decline substantially. Both Libya and Iran have previously been made exempt from Opec+ targets when war and sanctions hampered their ability to produce.
Russia’s foreign minister Sergei Lavrov is visiting Riyadh this week, meeting his Saudi and UAE counterparts. They reaffirmed their agreement to keep co-operating in Opec+. The oil exporters’ group cut output sharply in April 2020 but has been adding back some production each month.
“Even as Saudi-US relations move towards rapprochement, the kingdom is not going to turn its back on Russia,” said Amrita Sen at Energy Aspects, a consultancy.