Trump Wants Even Lower Oil Prices - and OPEC Will Quietly Oblige

Friday November 23, 2018

The Organization of the Petroleum Exporting Countries (OPEC) may be having its formal meeting in Vienna on December 6, but Bloomberg suggests that the real meeting to decide the direction of oil prices in 2019 will be the G20 summit in Buenos Aires a week earlier - an event that will likely see U.S. president Donald Trump discussing optimal prices ranges with his counterparts in Saudi Arabia and Russia.

According to the news agency, the oil market "is abuzz" with rumours that Saudi crown prince Mohamed bin Salman "may not be able to defy Trump’s desire for lower oil prices after the White House supported him following the killing of Washington Post columnist Jamal Khashoggi."

Another sign the G2 summit will be the de facto platform for deciding crude's fate is that it will also be attended by Khalid Al-Falih and Alexander Novak, the Saudi and Russian energy ministers respectively.

It's no secret that Trump wants the Saudis to keep pumping aggressively in order to reduce prices even further than they are now, with the view that cheap energy is the equivalent of a tax cut for the U.S. middle class.

While it's a populist goal, Andrew Lipow, president of Lipow Oil Associates, pointed out that it comes with undesirable side effects: "Exxon, Chevron, BP will survive because they are so big, but some of the smaller companies might have problems as costs are rising and revenue is falling."

But the million dollar question is, will Trump's political maneuvering be enough to force the Saudis - and by extension other countries - to maintain production rather than cut, even though the new prevailing perception is that the world is swimming in oil?

Many analysts think not: Helima Croft, global head of commodity strategy at RBC Capital Markets, said Saudi Arabia will act in its own self interest by backing a production cut; but most bizarre is the notion that the kingdom and OPEC will enact the cuts but try to message it so that does not antagonize Trump.

This notion was explained by OPEC and Saudi sources to The Wall Street Journal: OPEC would announce plans to retain current output targets, first set in 2016, which would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels per day (bpd).

A senior Saudi oil adviser said, “It will be still a big cut but less pronounced."

An OPEC official added that the cut "would be more discreet", would "be a quid-pro-quo" between the Saudis and Trump, and also avoid a confrontation with non-OPEC member Russia, which is reluctant to enact any cutbacks.

Apart from the obvious fact that the news agency let the cat out of the bag and the scheme is now doomed to failure, the analytical line of thinking assumes that OPEC is free and clear to decide however it wants to enact the cutback, when in fact members including Iraq, Libya, and Nigeria side with Russia in that they intend to boost production in 2019, not reduce - and this could cause a rocky G2 summit and Vienna meeting.

The OPEC sources also said that the Saudis will do anything to avoid vendettas from an angered Trump, and this may explain Khalid al-Falih earlier this week seeming to choose his words very carefully when commenting on the crude price issue and his kingdom's role in manipulating it: "We will not sell oil that customers don't need; we will not make the market get anxious in the way it did in May or June....everybody's interest is in our mind."