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Why is President Biden’s Visit to the Middle East Strategically Important?
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Why is President Biden’s Visit to the Middle East Strategically Important?

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President Biden is set to visit the Middle East this week. In this context, it is expected that the President is likely to ask for more supply of oil from OPEC countries. With U.S. oil producers already operating at 95% of their capacity, will OPEC be able to meet the rising demand for oil in the U.S.?

President Biden will be visiting the Middle East this week, and it is likely that he will ask the Organization of the Petroleum Exporting Countries (OPEC) countries, including Saudi Arabia, to boost their oil production.

In this context, it is important to look at why this visit is of far greater strategic importance in these turbulent times.

Higher oil prices are roiling not just the economy in the United States but also globally. Oil hit a multi-year high of $123 a barrel in March following Russia’s invasion of Ukraine, resulting in Western countries, particularly Europe, moving to ban Russian crude oil, resulting in a global supply shortage.

Currently, West Texas Intermediate (WTI) crude is trading at around $102 a barrel, down by nearly 16% from a high of $120 a barrel last month. This fall in the oil price has been attributed to rising interest rates by the Federal Reserve and other central banks around the world.

Higher interest rates result in a fall in oil prices. This is because an increase in interest rates results in rising costs for consumers which affects their consumption pattern, resulting in a drop in the consumption of oil, too, leading to a fall in prices.

In this scenario, we will look at the oil supply and demand situation and also at what the heads of some of the largest oil companies are saying about the oil supply and demand mismatch.

Oil Supply and Demand

Data from the U.S. Energy Information Administration (EIA) suggests that the largest oil producer in the world is the United States, with a share of 20%, followed by Saudi Arabia and Russia with 11% each.

Currently, 80.4% of the world’s crude oil reserves come from OPEC countries. However, OPEC has not been able to ramp up its oil production.

According to a Reuters report, while OPEC had planned to ramp up its output in June by 275,000 barrels per day (bpd), the organization was able to produce only 28.52 million bpd, a decline of 100,000 bpd from May.

In this scenario, against the backdrop of President Biden’s visit to Saudi Arabia, Bloomberg quoted Ben Cahill, a senior fellow at the Center for Strategic and International Studies, who pointed out, “A surge in Saudi production seems unlikely. Saudi Arabia and OPEC+ have very limited spare capacity, and they have to manage it carefully.”

Interestingly, according to the EIA, the U.S. is also the largest global consumer of oil, with a share of 20%. The United States consumes 20.5 million barrels of oil every day.

Could Global Oil Production Ramp Up?

This lag in global oil production has led to a supply and demand mismatch when it comes to this commodity. Earlier this year, faced with soaring oil prices and with an intention to curb the import of Russian oil, U.S. President Joe Biden urged oil producers in the U.S. to increase oil production.

But U.S. oil producers have been unable to meet the rising demand, and according to Bloomberg, are currently operating at 95% of their capacity. According to a Wall Street Journal report from May this year, the reasons for the limited oil production range from controlled capex, supply chain logjams, and harsh winter weather.

To add to the oil companies’ woes, there has also been increasing pressure from environmental groups to curb activities (including offshore drilling) that contribute to climate change. Even President Biden, during his presidential campaign, said that he would block new oil drilling projects on federal land.

Shell and Chevron’s Takes on Demand and Supply Mismatch

Late last month, even Shell’s (SHEL) CEO, Ben van Beurden, painted a bleak picture when it comes to energy supply. The CEO was speaking at an event in Singapore. Bloomberg quoted Van Beurden as saying that when it comes to energy, globally, it is a “turbulent period.”

Furthermore, the CEO pointed out that spare oil-producing capacity in OPEC countries was lower than expected, while there has been a drop in investment worth $1 trillion in the fossil-fuel industry over the past three years.

Van Buerden added, “We’ll face tight markets unless there’s very significant fallout in demand.”

A similar sentiment was echoed by Chevron’s (CVX) Chairman and CEO, Mike Wirth at the Bernstein’s Annual Strategic Decisions Conference last month. Wirth remained “pretty confident” that oil prices will continue to be on the higher side as “demand drivers right now tend to still be relatively strong.”

Elaborating further, Wirth pointed out that in the oil industry, production of 100 million bpd is a “lot of production” and “it tends to move in very small increments in normal times, 1%, 1.5% growth.”

In this context, Wirth added that with sanctions on Russian oil combined with a “strong surge in demand,” oil producers are finding it difficult to keep up with this demand, and response times tend to be longer.

ExxonMobil – Profiting Handsomely from Higher Oil Prices

ExxonMobil (XOM) is among the largest oil and gas companies in the United States. When it comes to oil production, the oil giant had stated at its Q1 earnings call that it was increasing its oil production in the Permian Basin in the U.S.

The company’s management had stated, “In March, we produced about 560,000 oil-equivalent barrels per day, on pace to deliver a 25% increase versus 2021.”

Moreover, XOM expects to profit handsomely from higher oil prices in Q2. Earlier this month, the company stated in a regulatory filing that it expects changes in liquid oil prices to boost Q2 profits by $1 billion to $1.4 billion and changes in gas prices to add between $1.5 billion and $1.9 billion to profits. Moreover, changes in industry margins could add another $4.6 billion to its profits.

Following this disclosure, Wells Fargo analyst Roger Read estimated that based on the midpoint of these changes, Exxon could earn a net income of nearly $17.9 billion, or $4.09 per share, with the higher end projected at $19.5 billion.

As a result, the analyst remained bullish on the stock with a Buy rating and a price target of $109, implying an upside potential of 27.3% at current levels.

Other analysts on the Street also side with Read and have rated the stock a Strong Buy based on 11 Buys and three Holds. The average XOM price target of $109.33 implies an upside potential of 27.6% at current levels.

Conclusion

It remains to be seen whether President Biden will be able to secure additional oil supplies from OPEC countries. One thing is clear —there continues to be a mismatch between oil supply and demand and it remains to be seen, how quickly oil producers will be able to respond to the soaring demand.

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