Persian Gulf oil producers hold off on embargo but remain at odds with US

Core OPEC members Saudi Arabia and the UAE, the first and third largest producers in the 13-member group, have so far rebuffed Iranian calls for an oil embargo against Israel amid the intensification of its war with Hamas, but analysts say that should not be interpreted as an olive branch towards the US.

As OPEC+ ministers prepare to meet Nov. 30 to discuss 2024 output levels, the US will be watching to see how low the group will go to prop up the market.

With US President Joe Biden facing a potentially tough reelection campaign in 2024, OPEC+ policy could play a critical role in shaping the voter sentiment, if the group's cuts boost gasoline prices – a key economic pressure point.

"OPEC has never been inclined to do any favors for the Biden administration," said Jim Krane, an energy research fellow at Rice University's Baker Institute.

OPEC holds some 4.6 million b/d of spare production capacity, concentrated in Saudi Arabia, the UAE and Kuwait – a robust level, given recent voluntary cuts implemented by OPEC+ that initially triggered a rally that saw prices nearly touch $100/b in September, but has fizzled in recent weeks.

Energy Pearl Harbor

Saudi Arabia is holding production at a two-year low of 9 million b/d, with more than a quarter of its approximately 12.5 million b/d capacity offline.

Similarly, the UAE has a quota of 3.18 million b/d, compared to a capacity of 4.65 million b/d.

Against a backdrop of lower OPEC+ supply, some coalition members have criticized the pro-Israel US stance, with Iran calling for a Muslim oil embargo against Israel.

However, the secretary general of the Gulf Cooperation Council Jasem al-Budaiwi has rejected calls for an embargo, akin to action in 1973, when Arab producers increased oil prices, cut production and halted shipments to the US for its backing of Israel in the war with Egypt and Syria. The GCC includes Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain and all countries are OPEC+ members except for Qatar.

Although Saudi oil shipments to the US in 2022 were similar to 1973 volumes, the dynamics of the market, US crude production, and current Gulf oil policy are different now.

The Oct. 7 Hamas attack on Israel, which came 50 years after the 1973 embargo that was dubbed "an energy Pearl Harbor" by an aide of then US President Richard Nixon for quadrupling oil prices, has had no market impact.

US oil stocks

Platts' assessment of Dated Brent has dropped to $79.48/b on Nov. 22, from $91.3/b on Oct. 9, according to S&P Global Commodity Insights data.

In the event of an embargo, "oil consumers would do their best to reduce consumption and we would see some level of demand destruction," Krane said. "The price increase would affect all oil importing countries including those with no role in the conflict, like China and India. It would be hard to justify such a collective punishment strategy."

Unlike 1973, when US oil production was on the decline, the country's output rose to a new monthly high of 13.05 million b/d in August.

Saudi Arabia, though, may play hardball if Biden asks it to ease oil cuts to help him win over voters in the elections.

In 2022, Biden ordered a release from the Strategic Petroleum Reserve, which is now near a 40-year low, before the November mid-term elections as OPEC+ announced production curbs.

"The Biden Administration may consider an SPR release closer towards the election if prices are elevated, and this of course raises the issue that previous releases may have been premature given the possible risk scenarios we now face," said Karen Young, senior research fellow at Columbia University's Center on Global Energy Policy.

Pariah state

Biden vowed "consequences" against Saudi Arabia in 2022, after it led OPEC+ to agree to a 2 million b/d cut starting November of that year, which has been extended till the end of 2024.

At the time, Biden aides accused Saudi Arabia of implementing the cuts to back Russia, which supported Arabs in 1973, in its war in Ukraine.

"If the Saudis won't play ball and high prices start to damage Biden's re-election hopes, I'd guess that Biden would OK another release from emergency stocks," Krane said.

There is no love lost between Biden and Saudi Arabia. While campaigning for the US presidency in 2019, Biden called Saudi Arabia a "pariah" state.

"Saudi Arabia and the UAE will have special leverage with the US in the coming months and I would expect that existing negotiations between the US and Saudi Arabia on defense security cooperation and nuclear energy will be intense," said Young.

Prior to the Hamas attack, Saudi Arabia was in talks with the US over a three-way deal with Israel, which would have included security guarantees in return for normalization with the Jewish state. Now that deal is on the back burner.

"Absent some type of large-scale supply shock, if prices are below $100/b, we do not anticipate that OPEC+ members will increase production or undo unilateral cuts anytime soon," said Jim Burkhard, vice president of oil markets at S&P Global Commodity Insights. "But there are always surprises. One key uncertainty is the future of a potential Israeli-US-Saudi deal on diplomatic recognition, defense, and nuclear energy. It is difficult to see oil completely left out if there is a ground-breaking deal."