Sometimes a tweet is just a tweet. But with the current president of the United States, you never know. That’s why oil markets shouldn’t ignore President Trump’s recent anti-OPEC missive on Twitter.
“Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially high Very High! No good and will not be accepted,” Trump tweeted on April 20.
This could simply be Trump trying to score political points at home by bashing OPEC. Most past presidents have engaged in similar behavior at some point during their tenures in the White House since the cartel was formed in 1960. But Trump’s unpredictable nature should give oil markets pause, particularly since the president has a policy tool at his disposal – releasing oil from the Strategic Petroleum Reserve (SPR) – to try to cool price spikes.
While selling SPR oil is meant to address real supply shortages, they have been used in the past for non-emergency purposes. Recall that in June of 2011 President Obama released 30 million barrels from the SPR citing supply outages in Libya – which hardly qualified as an emergency at the time. The real reason was that benchmark Brent oil was trading around $115 a barrel and retail gasoline prices were above $4 a gallon in many parts of the United States. It was a political calculation, pure and simple.
With the summer driving season around the corner, Trump may be following a similar path. Oil prices continue to hit new highs with Brent trading around $75 a barrel and big speculative bets being made in futures markets for $80 in the coming months. Some traders are even betting that oil will hit $100 a barrel by December.
Meanwhile, Saudi-led OPEC and its non-OPEC partners plan to keep their price-supportive production cut deal in place through the end of the year, even as organizations like the International Energy Agency (IEA) say the group has already achieved its goal of returning global oil inventories back to their five-year average. It all smacks of Saudi Arabia and OPEC wanting even higher prices and, indeed, reports have surfaced that the kingdom is targeting prices of $80-$100. Which makes sense when you consider that Riyadh plans to list the sale of Saudi Aramco in the near future. Higher oil prices would equal a higher valuation for in the public offering of the state-owned oil giant.
Of course, U.S. oil producers are also benefiting from higher prices and stand to benefit more if prices continue to climb – at least in the short-term. A return to $100 oil is not good for the United States or the broader oil industry – and even OPEC seems to understand that when prices go too high, there’s a backlash.
Pioneer Natural Resources Chairman Scott Sheffield has warned that it “does nobody any good to see oil at $75-$80” or higherbecause such prices will ultimately hurt oil demand and the industry risks losing long-term market share to alternative energy technologies. Prices in the $55-$70 range are the sweet spot for both producers and consumers, particularly since oil can now be produced profitably at $20-$30 a barrel in parts of the Permian Basin and Bakken Shale.
For President Trump, the challenge is how to deal with the changing relationship between the United States and the Middle East. As a consumer, America has traditionally operated as the weaker partner with the cartel. It now finds itself a rival on the global supply and export market.
The president’s tweet may merely be an attempt to align himself politically with American drivers as the switch to high-priced summer blends prompt angry outbursts. Rising gasoline prices also threaten to offset any bounce in approval ratings the president may be enjoying from his tax cuts. The takeaway is that the president may, in fact, be thinking of taking action – such as an SPR selloff to try to dampen prices.
An SPR release would probably succeed in blunting prices in the short-run, but it would also likely irk Saudi Arabia – one of the few countries with enough spare oil production capacity to actually move the market – while oil market fundamentals would remain bullish.
That’s partly because of the president’s stance on Iran and expectations that he plans to pull the United States out of the nuclear deal. By some estimates, renewed U.S. sanctions on Iran could hit the Islamic Republic’s oil exports by 400,000 to 500,000 barrels a day. Market watchers are also concerned with other geopolitical events, including mounting sanctions on Russia, Venezuela’s continued meltdown and recent U.S. military strikes in Syria.