After some uncertainties and U-turns, the White House has confirmed President Joe Biden’s first trip to the Middle East, including a stop in Saudi Arabia. The trip, scheduled from July 13 to 16, will see the U.S. Commander-in-Chief meets Saudi Crown Prince Mohammed bin Salman, the same man the U.S. intelligence said is linked to the brutal murder of journalist Jamal Khashoggi.

 

It was only in 2020 that Joe Biden called Saudi a “pariah”. During Biden’s first year in office, he refused to speak with Crown Prince Mohammed, the de-facto leader of the kingdom. The president then released the Central Intelligence Agency’s conclusion that the crown prince had ordered the 2018 murder of journalist Khashoggi. He promised to make a pariah out of Saudi over the gruesome murder.

 

The American president’s plan to visit Saudi and to meet the crown prince is certainly laughable and screams hypocrisy. Even rights advocates from the Western countries have condemned Biden’s visit to Saudi – even calling it a “stupid visit”. Abdullah Alaoudh from think-tank “Democracy for the Arab World Now” said the visit to the kingdom was a “betrayal”.

Exactly how could the U.S. president, after repeatedly promised that “human rights will be the centre of our foreign policy”, not to mention his pledges to hold Saudi Arabia accountable for its poor human rights record, suddenly reverse his principles and break his promises? The POTUS’ visit will not only legitimize the murder of Khashoggi, but also encourage Saudi to openly abuse human rights.

 

However, even if Sleepy Joe kneels, begging for oil and forgiveness from the Saudi Crown Prince, there’s no guarantee that the kingdom will pump more oil to bring down the prices. Early this month (June 2), even after the OPEC oil cartel and allied producing countries, including Russia, agreed to raise production by 648,000 barrels per day in July and August, the prices of crude oil refused to go down.

 

Instead, the price shot up. Despite promise by OPEC+ to bring forward oil production increases to offset lost Russian output as a result of sanctions as a result of Russia’s invasion of Ukraine, Saudi quickly hiked its selling prices for July for its customers in Asia and Europe. Gullible investors who initially cheered the production increase were clearly played by Saudi Arabia.

There are basically four major problems. First of all, the credibility of OPEC+ has always been in question. Most of the time, the members cannot commit what they had promised. Secondly, the oil producer group cannot produce as much crude to compensate Russian lost of output. Thirdly, OPEC’s relationship with Russia is much closer than the U.S. thought.

 

In March, a month after the invasion of Ukraine, UAE Energy Minister Suhail Al-Mazrouei said that Russia would always be a part of OPEC+, despite Western sanctions on Moscow. Saudi Energy Minister Prince Abdulaziz Salman said OPEC+ would not mix politics with business – suggesting that the Gulf states were seriously seeking an “independent foreign policy” based on national interests.

 

Fourthly, why should Saudi help Biden when the kingdom is benefiting from the current high oil prices? Besides, the U.S. has become a rival oil exporter since America developed new methods of extracting oil and gas from shale deposits known as “fracking”. Even before the Ukraine invasion, Biden made a rare phone call to King Salman in early February, begging for more oil, only to be ignored.

Biden could go home empty-handed after his coming July visit to Saudi. The crown prince, who refused to take the U.S. president phone calls in March, might play him again. The visit could be designed to show the world how the world’s most powerful man has to kowtow to the young Saudi prince. Crucially, Biden would be seen as having forgiven the crown prince’s murder of Khashoggi.

 

At the same time, Saudi could benefit from Biden’s visit as it would calm the oil market and prevent inflation in the kingdom itself. The U.S. president most likely will emerge from the visit with claims that he had lectured the kingdom about improving human rights, while Saudi shows its neutrality by taking the middle path – an ally of America as well as a friend of Russia.

 

While Saudi would not and could not help the U.S. to bring down the prices of oil, Russia can certainly wreck havoc to the current global inflation even before Biden’s visit to Saudi. On May 30, the European Union announced that it will cut 90% of Russian oil imports by year end. Why 90% and not 100% and why by year end and not immediately or in another two months?

It appears that the European Union’s decision to sanction Russian oil could be nothing but empty political rhetoric, betting that the Ukraine war could be over in another six months and everything would be forgotten. Russia is the world’s third-largest oil producer, behind the U.S. and Saudi Arabia, and the world’s largest exporter of crude to global markets.

 

More importantly, Russia is also a major producer and exporter of natural gas. Can Europe really find a replacement for its current Russian gas within 6 months? The oil market was not convinced and reacted with higher oil prices. Likewise, Moscow did not waste time and instantly retaliated by pledging to find other importers for its oil, especially India and China – with 30% discount.

 

It’s both inspiring and sexy to hear the E.U. screams – “We must become independent from Russian oil, coal and gas”. In reality, it’s wishful thinking to say it could find other supplies for the continent’s 155 bcm (billion cubic meters) of gas, which it imported from Russia in 2021. The U.S. said it will try to supply 15 bcm of liquefied natural gas (LNG) to the E.U. this year, but clearly it’s too little too late.

Analysts said U.S. LNG plants are already producing at full capacity, and any additional U.S. gas sent to Europe would have to come from exports that would have gone elsewhere. No matter how you calculate, Europe will definitely struggle to replace all Russian gas exports in a short period of time. The commodity is not some Instagram photos that you can upload or download instantly.

 

President Vladimir Putin has demanded “unfriendly” nations in Europe pay for Russian gas in rubles, a clever strategy to boost the value of the currency. Poland and Bulgaria have already been punished when their supplies were cut after they refused to pay in the Russian currency. Now, supplies to Finland, Denmark, the Netherlands and Germany have also been cut for the same reason.

 

Early last week, Russia’s Gazprom deliberately limits supplies via the Nord Stream 1 pipeline, reducing gas supplies by 40% to Italy, Austria and Slovakia. France is no longer receiving any natural gas from Russia. Gazprom has claimed technical problem for the supply cut, arguing that the issue came from the delayed return of equipment serviced by Germany’s Siemens Energy.

So, Gazprom has blamed Siemens Energy for failing to return pipeline compressor equipment at the Portovaya compressor station – part of the Nord Stream 1 pipeline that carries Russian gas to Germany – that was sent to Canada for repairs, which Siemens in turn blamed on sanctions.  European leaders said it was another political tactic by Putin designed to push up gas prices.

 

Subsequently, the European Union scrambled to fill underground storage with natural gas supplies after remarks from Gazprom CEO Alexei Miller that hinted Russia could abruptly cut more supplies in the coming weeks. Miller said during a panel session at the St. Petersburg International Economic Forum – “Our product, our rules. We don’t play by the rules we didn’t create.”

 

Obviously, Putin was trying to create chaos – even revenge – for the coming winter season, in retaliation for the E.U. decision to reduce gas imports from Russia. To make matters worse in Europe, an explosion and fire at a key U.S. export facility in Freeport, Texas, took one-fifth (20%) of the country’s gas export capacity offline, raising concerns over gas exports to Europe.

On June 6, the Schwechat refinery in Austria suffered damage. The U.K.’s Fawley refinery had a fire on June 6, amid labour strikes. A fire that broke out at France’s Donges refinery has kept it offline. A Romanian diesel facility only recently came back online after a long repair, while the Dutch Pernis refinery is slowly coming back to life after its own repairs.

 

Like it or not, Putin still holds the cards when it comes to global energy. Those who thought the Russian president has miscalculated when he invaded Ukraine are dead wrong. And Putin is calling the Western powers bluff now because while the European Union decided on June 3 to stop buying Russian oil by year end, the sanction actually did not cover natural gas or coal.

 

And that’s precisely where Putin wanted to hurt the E.U. The conventional wisdom was that Russia could not afford to lose the European energy markets for its exports any more than the E.U. could afford to lose Russian oil and gas imports. Russia was supposedly dependent on Europe buying its oil and gas and coal for 60% of its revenues, translating to 45% of its budget and 14% of GDP – US$430 billion per year.

Likewise, the E.U. is dependent on Russia for 40% of its natural gas, 27% of its oil, and 45% of its coal. Therefore, it was mutually assured economic destruction if either side tried to break away from the equation. Now that the E.U. is trying to break away, Putin calculated that he could teach Europe a lesson because European gas storages are only at 52% full.

 

With Nord Stream 1 running at current 40% capacity, analysts calculate that European storages will not exceed 69% by Nov 1, 2022, putting the continent in risky position if the winter in early 2023 is cold. It didn’t help that a heat wave in Europe has increased power consumption, sending natural gas price skyrockets. The evil Putin wants to enjoy watching the European energy crisis explode.

 

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June 19th, 2022 by financetwitter

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