Biden’s call on OPEC to relax production cuts and oil demand outlook

In this interview with Cyba Audi from Asharq Business Bloomberg, Dr Carole Nakhle, CEO of Crystol Energy, discussed US President Joe Biden’s request for OPEC to relax production cuts, and the latest demand forecasts released by the International Energy Agency (IEA) and OPEC.

Dr Nakhle started by explaining the US’s blurred stance on oil prices under the Biden Administration. On one side, the US President wants to “pause” new oil and gas leases on certain areas in the country and embrace climate change policies (which need higher oil prices), but on the other side he urges OPEC to relax its production cuts in order to ease the economic burden that high prices can impose on the US economy. These contradictory statements are the result of the two roles that the US is playing simultaneously. First, the US is the biggest oil consumer in the world and high oil prices do not favour a healthy economic growth especially given current circumstances, and second, the US is the biggest oil producer, thanks to the shale revolution, meaning that domestic oil production favours high prices.

It is unclear why would OPEC respond favourably to Biden’s request particularly with the prevailing uncertain outlook for oil demand and the rapid spread of the Delta variant.

Commenting on the contradictory demand forecasts, Dr Nakhle argued that this is a reflection of the uncertainty in oil markets. However, three observations can be made.

First, while OPEC maintained a steady oil demand outlook, it upgraded economic forecasts. Second, the IEA downgraded its demand forecast by more than 0.5 million barrels a day – one of the highest downgrades in recent reports. Finally, OPEC, in its latest report, had a more optimistic demand outlook than the IEA, which isn’t traditionally the case – at least not over the last 18 months or so. All of these mixed signals are due to the overall market uncertainty from poor vaccination and the rise of Covid-19 cases, particularly in Asia.

Dr Nakhle concluded that the oil demand and economic pathways are towards recovery, albeit the recovery being at a relatively slower rate. Previous forecasts indicated a stronger growth but that was hindered due to the slowing growth from Asia, the world’s oil demand growth engine.