After a weekend of turmoil, largely caused by President Trump’s twitter diplomacy, the international oil cartel could soon be facing a new crisis.
As previously reported, Saudi Arabia and Iran have been on a collision course since the recent OPEC+ Vienna meeting. Tehran has openly opposed the OPEC+ oil production increase, but was willing to compromise based on an understanding that OPEC members wouldn’t fall below a 100 percent compliance rate in the existing agreement. At the same time, Saudi Arabia, the largest spare production capacity holder, seemed to be reluctant to flood the market right away. A consensus was found in which OPEC members could produce more by filling the gaps in supply caused by the U.S. sanctions on Iran and falling Venezuelan production.
But supply disruptions have been far greater than OPEC had originally prepared for, with the recent force majeur in Libya being an example of that. Some analysts believed that a small OPEC increase would be enough to stabilize the market, without putting extreme pressure on prices. In their opinion, Saudi spare capacity, alongside the U.S. shale oil boom should have been enough to counter any mishap in the market.
This narrative was taken as a fact by the mainstream media and Western political leaders, with Trump being one of its main supporters. The idea of ever increasing U.S. shale oil production which would help balance out the markets was supported by the myth of U.S. energy independency and global energy dominance.
OPEC was considered a caretaker that would only be used once all other options ran out. But Washington’s dream of energy dependence, dominating the global oil market, has evaporated with a tweet of less than 100 words. Trump’s ill-advised tweet indicating that he had asked Saudi King Salman to raise production by 2 million bpd can be seen as an admission of the U.S.’ dependence on OPEC. It can be read as the President officially admiting that the U.S. is NOT able to counter the expected removal of Iran’s oil export volumes with its own shale production boom. In order to mitigate the damage, the U.S. State Department soon responded with its own assessment of the phone-call between the two leaders.
Saudi reactions until now have been muted. Officials have reiterated that Trump’s views are being noted as a U.S. concern, but decisions are being made from within OPEC, not by outsiders. Still, volatility has shot up, resulting in doubts on all fronts about the stability of OPEC as a group, the viability of the Vienna agreement, the role of Iran and the overall spare production capacity available on the markets. This doubt over spare production capacity is now sure to be an unexpected boon for speculators.
A deal within OPEC is needed soon, to counter the possibility of a real price hike, as millions of barrels per day of oil are expected to leave the market before the end of 2018. In fact, crunch time may have already arrrived, with Libyan oil production constraints growing and the specter of a prolonged Libya-wide war pushing still more uncertainty. The OPEC+ deal from Vienna already seems irrelevant, not just due to the Iranian hardline opposition but due to geopolitical developments.
The first priority at present will need to be to counter unrest in the market, and fill up any supply gap caused by Libya. At the same time, OPEC’s Secretary General Barkindo and OPEC chairman Mazrouei need to find a solution to prevent Iran from hijacking the market. Tehran has already been calling for a possible emergency meeting. If this comes to fruition within the next 6-8 weeks, prices will be shooting through the roof. Iran is also facing another issue, with internal unrest destabilizing the country. The only financial life-line for the Islamic Republic seems to be oil and gas. Analysts should keep an eye on these reports, as it will fuel the confrontation within OPEC for sure.
Still, the only way at present to be clear about oil politics is maybe to be a Twitter addict. Trump’s usage of this internet phenomena is already causing havoc. What is notable, however, is that by blaming OPEC for manipulating the oil market, the U.S. president appears to be admitting that shale oil is still not the power player it is depicted as being. The long-term future of shale oil was already in doubt, and Trump’s latest tweet just adds fuel to that fire. The U.S. blaming OPEC for pushing oil prices up is somewhat ironic in itself, and the largest short-term catalyst for oil prices has been the leaving of the Iran deal by the U.S. If analysts are to read Trump’s latest tweet as an admission that U.S. shale is unable to make up for the loss of Iranian oil, prices will be given yet another boost.
At the same time, Trump’s latest actions could be undermining OPEC. By emphasizing the power and importance of the oil cartel, OPEC is being forced to show its cards. Saudi Arabia has been pushed into a corner, as they are now the one source that most observers will be watching to bring more production online. The need for additional volumes is clear. In the coming weeks, Riyadh will need to open up every resource, valve and storage tank, to keep up the dream of a well-supplied oil market, whatever happens. If they can’t manage to do this, Saudi Arabia and OPEC could be about to face a broader crisis. A shortage on the supply side is not what all parties are currently vying for. Prices should stabilize around $75-85 per barrel, leaving enough room for economic growth. Trump’s tweet has now broken this $85 per barrel upper limit.
U.S. shale oil is most probably smiling, as their production horizon is short-term based. A quick buck is better than long-term supply security. For OPEC, Russia and the global economy, a stable price is a necessity. Trump’s tweets, however, are causing total destruction, including for his own voters looking for lower gasoline prices.