US tries oil diplomacy to ease sanctions fears

The US administration is publicly urging Mideast Gulf Arab partners to increase oil output to reinforce its narrative that US sanctions on Iran will not leave the world short of crude.

The State Department says it is encouraging Opec countries to utilize spare capacity to ensure world oil supply meets the demand. Opec and its partners in the Vienna output cut agreement "continue to withhold oil production," the State Department said. It said that Opec "is not deploying" its spare capacity of 1.42mn b/d" — an estimate provided by the Energy Information Administration (EIA) in its latest report on the effects of Iran oil sanctions. The US will reimpose oil sector sanctions on Iran on 5 November, but exports from that country already are falling sharply.

US energy secretary Rick Perry said last week that Saudi Arabia and Kuwait plan to re-activate production in their shared Neutral Zone, possibly adding 250,000-300,000 b/d. Washington is also pushing Iraq's central government to resolve a dispute with the Kurdistan Regional Government over northern Iraqi oil fields that could add another 250,000 b/d.

And it is eager to highlight the US' own growth in production. The EIA projects US crude output rising to 11.5mn b/d in 2019 from 10.66mn b/d in 2018. "A lot of inside estimates in the agencies in our government are suggesting 15mn b/d in 2020," White House chief economic adviser Larry Kudlow said today. The yet-unsubstantiated projection would require a 30pc jump in production.

President Donald Trump, with an eye on the mid-term elections on 6 November, is himself contributing to the effort with trademark attacks on Opec and its key producers. Trump in political rallies in West Virginia, Pennsylvania and Tennessee earlier this week said he asked Saudi King Salman bin Abdulaziz in a phone conversation on 29 September, "why are we subsidizing the Saudi military?" Trump says the Mideast Gulf countries should heed Washington's requests to bring down oil prices in exchange for continued US military protection.

The US efforts may have yielded some results. Saudi Arabia is currently producing 10.7mn b/d, and its output will go slightly higher in November, oil minister Khalid al-Falih said yesterday at the Russian Energy Week conference in Moscow. That compares with 10.4mn b/d in August.

"My position on the price is that it is left to the markets," al-Falih said. "What we can influence is fundamentals, and the fundamentals today are extremely healthy. Inventories are actually building counter-seasonally." Saudi Arabia and Russia together have added 1mn b/d of supply since June, in addition to higher volumes from the UAE and Iraq, he said. "We have to assume that geopolitical tension and speculation will ultimately ebb and we will see stability back in the market."

The recent increase in oil prices has nothing to do with the Opec/non-Opec agreement, Russian president Vladimir Putin said at the conference in Moscow. "Let us be frank — the high prices today are substantially the result of the US administration's policies" targeting Iran, Venezuela and Libya, Putin said. "I had a good summit with the US president in Helsinki. If we had discussed this subject, I would have told Donald to look in the mirror if he was looking for a culprit behind the oil price hike."

Russia in recent months increased output by 400,000 b/d and can add another 200,000-300,000 b/d "if necessary," Putin said.

Russia stands to gain market share and tax revenue as a result of curbs on Iran's exports, even though it opposes Trump's decision to exit the Iran nuclear deal and re-impose sanctions on exports of oil from that country.

Putin said the EU plan to bypass US financial sanctions on Iran was a belated move, "but better late than never."

Russia also is considering payment mechanisms to bypass the US dollar because of the risk of additional US sanctions, Russian energy minister Alexander Novak said today.

Surgutneftegaz, a major Russian oil and gas producer whose general director Vladimir Bogdanov is on the US sanctions list, already is demanding its overseas crude buyers sign agreements to potentially pay in euros instead of US dollars.