U.S. Attempts to Thaw Relationship with Saudi Arabia and Venezuela as Gasoline Prices Continue to Soar

Reports from Washington D.C. emerged today that the U.S. government has started preliminary discussions with their Saudi Arabian counterparts to arrange a meeting between the heads of the two States. The first in-person meeting between Joe Biden and the Kingdom of Saudi Arabia’s de facto leader, crown prince Mohammed bin Salman (MBS), could lead to improved ties between the two countries.

The relationship between the two largest oil-producers has been weak post the state sanctioned killing of journalist Jamal Khashoggi in October 2018. In April 2020, the President authorized the declassification of an intelligence report that directly and personally linked MBS to the assassination of Khashoggi. MBS’s younger brother and right-hand man, Khalid bin Salman, was present in the U.S. capitol today and met with senior officials to broker the meeting between the two leaders. 

The move comes after Biden declared that his number one domestic priority for the remainder of his first term in office would be to reduce the inflation rate that has pinched the buying-power of ordinary Americans. Gasoline and diesel prices, which have surged to an all-time high, are weighing heavily on the headline consumer price index, which was up 8.3% year over year in the month of April.

Gasoline prices at the pump closed Wednesday at a national average high of $4.56 per gallon, and there are indications that the price could jump as high as $6 per gallon as soon as August, just as the U.S. enters its busiest travel season. Complicating the picture is the fact that numerous refineries in the northeastern part of the country were recently mothballed, and others in the west are experiencing untimely maintenance shutdowns.

The global oil demand-supply picture has also been in flux recently due to Russia’s invasion of Ukraine, and OPEC’s subsequent refusal to increase production to compensate for Russia’s supply. Russia was the world’s third largest oil producer, and any effort to replace its supply would require significant increases from all the other major producers in the world, starting with Saudi Arabia.

The Kingdom has the largest easily accessible excess spare capacity of any country in the world. However, due to the poor relationship between it and the West, the country has been reticent on stepping into the void left by the Russians. Per reports emerging from the country, part of the Saudis demands for helping the West in the energy sector has been a return of normal diplomatic relationship between the two sides, and for the Western countries to refrain from talking about the Kingdom as a pariah nation.

Additionally, the current U.S. administration has continued softening its stance on Venezuela and Iran. On Wednesday, the Biden administration decided to ease sanctions against Venezuela, that would allow the country to immediately re-start oil exports to Europe. While U.S. Energy Secretary Jennifer Granholm clarified today that the U.S. itself doesn’t plan on accepting Venezuelan oil, greater global production, and supply specifically to Russian oil dependent Western Europe, could have a strong impact on pushing oil prices down.

Moreover, U.S. oil giant Chevron, which had a large presence in Venezuela, would also be allowed to negotiate a resumption of operations according to the new guidelines. This easing of penalties on the country, which has one of the largest oil reserves in the world, could alleviate the tight oil market, and help wean Europe from its Russian oil dependence.

Though the Iranian nuclear deal has lost some of its momentum in recent months, simultaneous and orchestrated increases in production from Saudi Arabia, Venezuela, Iran, and the U.S. would make a substantial dent in the potential supply deficit from larger sanctions on Russia.

Even though any concrete deal between the West and these nations could cause oil prices to fall sharply in the near-term, the energy sector is not one investors should abandon just yet. Despite the stellar returns from oil and gas companies over the past 52 weeks, higher margins and a considerably improved credit picture for most in the value chain could be the rising tide that lifts all boats.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.