Fracturing US-Saudi oil pact adds to Fed’s inflation stress | Insights | Bloomberg Professional Services

This article was written by Ziad Daoud and Courtney McBride. It appeared first on the Bloomberg Terminal.

Just three years ago, when OPEC+ oil giants fell out, the US found itself playing the role of peacemaker. Now it looks more like their target.

The Saudi-Russia oil alliance has the potential to cause all kinds of trouble for the US economy — and even for President Joe Biden’s re-election campaign. This month’s OPEC+ decision to cut crude output, for the second time since Biden flew to Saudi Arabia last summer seeking an increase, may be just the start.

That April 2 announcement has lifted oil prices by about $5 a barrel. OPEC’s own projections show that the cuts will widen the supply shortfall later this year. That means inflation will be higher, and recession risks are bigger than they otherwise would have been — because consumers spending more on energy will have less cash left for other stuff. Russian President Vladimir Putin, meanwhile, gets a bigger war-chest to fund his attack on Ukraine.

But more significant is what the OPEC+ move says about the likely path of oil prices over the coming years.

In a world of shifting geopolitical alliances, Saudi Arabia is breaking away from Washington’s orbit. The Saudis set oil production levels in coordination with Russia. When they wanted to ease tensions with regional rival Iran, they turned to China to broker a deal — with the US left out of the loop. Western influence over the oil cartel, in other words, is at its lowest point in decades.

And the OPEC+ members all have priorities of their own, from Saudi Crown Prince Mohammed Bin Salman’s ambitious plans to reinvent his economy, to Putin’s war. Any extra revenue they get from charging more for oil is a help.

Asked about US concerns that OPEC+ has twice elected to cut production since President Biden’s visit to Saudi Arabia, a State Department spokesperson said the administration is focused on holding down domestic energy prices and ensuring US energy security. The US views production cuts as inadvisable given ongoing market volatility, but will wait to see what actions OPEC+ ultimately takes, said the spokesperson.

Meanwhile, the threat of competition from US shale fields, a deterrent to price hikes in the past, has receded. And while there’s a global effort to reduce fossil-fuel use —  and higher prices will accelerate that effort — the dash to drill in the last year shows that the zero-carbon economy remains more long-term aspiration than short-term driver.

Add all of this up, and while some analysts say demand hurdles mean the recent bump in prices could prove fleeting, most anticipate prices above $80 a barrel over the coming years — well above the $58-a-barrel average price between 2015 and 2021.