It’s becoming painfully clear that the way forward for global oil markets is going to be bumpy, very bumpy, particularly as we head into next year. Much of this uncertainty, even blame, is being increasingly leveled at a person that has surprised, flabbergasted and even shocked political opponents, allies and adversaries alike since he took office – President Donald Trump.
A growing line of thought surmises that while Trump uses the presidential bully pulpit, in this case Twitter, to put pressure on long-time ally and de facto OPEC leader Saudi Arabia to get ready to pump more oil to keep (both oil and gas) prices from spiraling out of control, much of the blame for higher prices actually belong to Trump.
The argument makes perfect sense.
If Trump would ease back on both his heated rhetoric toward Iran, though that case could be made over much of Trump’s dealings with China, the EU, Canada and others, and if Trump would revisit his decision on re-imposing sanctions on Iran, then oil markets would benefit.
Why? A softer line on Iran would reduce the worry or even fear that a loss of some 2.7 million barrels per day (bpd) of Iranian crude would roil oil markets so much that the Saudis would have to pump an unprecedented amount of oil, perhaps as much as 12.5 million bpd, eating up all of its spare capacity.
The Saudi’s have never pumped more than around 10.7 million bpd of oil, a level reached in June, and has for more than 50 years kept at least 1.5-2 million bpd of spare capacity for oil market management.
Under such a worst-case scenario, global oil markets would be dangerously exposed to any oil demand/consumption increases as well as geopolitical developments that always take aim at global oil markets. A recent Bloomberg article articulated the problem well. It said that “the simple truth is that there isn’t enough spare capacity in the world to replace the complete loss of Iranian exports.”
“Saudi Arabia can boost output to 11.5 million bpd immediately,” the report added, citing a 2016 interview with Saudi Crown Price Mohammed bin Salman. It can also go to 12.5 million in six to nine months, Bloomberg added, but the prince has said nothing since then to suggest the figures have changed.
Trump’s thinking called into question
However, all of this seems to be lost on Trump. With mid-term November elections approaching and decisive House and Senate seats in contention, much of the second half of the president’s term could be jeopardized if higher gas prices (amid higher oil prices) eat into voters’ pocket books and they take their frustration out at the polls. Trump’s only plan appears to put undue, perhaps geopolitically damaging pressure on the Saudis to make up for anticipated lost barrels when the Saudis likely can’t do it alone.
It’s also apparent that Trump has taken an emboldened stance with the Saudis since its Riyadh who was instrumental in Trump’s decision to re-impose Iranian sanctions.
With oil production problems persisting in Libya and in Venezuela and with those problems likely to carry into the fall election season and beyond, Trump is playing a dangerous game and could find his back against the wall. Voter angst in November would also spill over into the upcoming 2020 presidential election season. Consequently, the often-used campaign slogan of presidential incumbents, “Re-elect the President” may fall on deaf ears.
Two weeks ago, Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch, said Trump’s push to disrupt Iranian oil production could cause oil prices to hit $90 per barrel by the end of the second quarter of next year. Others have forecasted even higher prices, breaching the $100 plus per barrel price point.
The only option, alluded to at the top of this piece, would be for Trump to re-engage with America’s European allies over Iranian nuclear development and other concerns. This would tone down oil market worries and perhaps even open the door for re-negotiation with both the EU and in time Tehran – in essence, cooler heads and diplomacy would prevail. However, there is little chance that the president would, or even could at this point, change his mind without losing immense political face. Something, thus far, he has been unwilling to do.