The tweet moved the Saudis.
That’s from Bob McNally, founder of Rapidan Energy Group LLC and a former White House oil official who spoke to Bloomberg on Friday about the ongoing plunge in crude prices. “The message was delivered loud and clear,” he continued.
While I’m not sure “clear” is ever the best term to describe anything Trump says, “loud” certainly works as a descriptor.
Bob is of course referring to an absurd tweet from April 20, when noted commodities strategist Donald Trump accused OPEC of being “at it again” where “it” was apparently a reference to the cartel doing what cartels are wont to do: manipulating prices.
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 Very High! No good and will not be accepted!
— Donald J. Trump (@realDonaldTrump) April 20, 2018
As usual, it wasn’t entirely clear what Trump was talking about with the “ships” and the “oil all over the place” bit and it was equally unclear why the word “oil” was capitalized, but specifics aside, the overarching point seemed to be that Trump was afraid that surging crude prices would end up offsetting the benefits he imagines are accruing to U.S. consumers from his signature tax cuts. In other words, it’s possible he was worried about this:
To say that Trump’s sway over OPEC is debatable would be an understatement. All else equal, it is not at all clear they give a fuck what he thinks.
But all else is not equal here – not at all. Trump’s hardline stance on Iran is welcome news in Riyadh, especially in light of Tehran’s expanding regional influence. Hezbollah’s hand has been strengthened militarily in Syria and politically in Lebanon, Tehran basically controls Iraq (although al-Sadr is obviously a wild card) and the IRGC-backed Houthis are still holding out in Yemen. In addition to exiting the nuclear deal, Trump’s move to sanction Iran’s central bank governor and subsequent effort to turn the screws on Hassan Nasrallah (a move executed in conjunction with the Sunni powers) all serve to endear him to MbS, whose ties to Jared Kushner are well known.
Of course all of that exacerbates sectarian tensions and that, in turn, raises the geopolitical risk premium embedded in crude prices. When you throw in the fact that this particular escalation has an ostensibly quantifiable supply impact (and I use “ostensibly” there because given the uncertainties surrounding how things will progress, it’s not possible to know how many Iranian barrels will actually be lost if Washington and Tehran remain at odds on the JCPOA) and the fact that Trump has surrounded himself with Iran hawks (most notably John Bolton and his mustache) you end up with sharply higher crude prices. And then there’s Venezuela.
In the aftermath of Trump’s official announcement, some began to call for $100 crude. Here’s how we described this situation after BofAML became the first Wall Street bank to raise the specter of triple-digit oil:
While the Saudis support Trump’s decision on Iran, they’re also pretty keen on seeing higher prices in the interest of driving up the valuation on Aramco and also for other reasons tied to the Kingdom’s fiscal position and financing the ongoing (and seemingly intractable) conflict with the Houthis in Yemen (bombs ain’t cheap, yo!)
And because there’s only so much money you can extort from your relatives on the way to replenishing your reserves, oil prices need to rise even if that entails otherwise uneconomic U.S. production comes back online or is further emboldened.
Given that, the assumption that Riyadh is going to be willing to step in and replace any lost Iranian barrels in the interest of keeping prices anchored seems a bit tenuous – no matter what the official word from the Kingdom is.
You’ve got to think Trump is going to be pretty damn pissed off if a surge in oil prices ends up undermining the “tremendous, bigly, big league” economic renaissance he thinks he’s ushered in for America. To be clear, there is absolutely nothing “tremendously” anomalous about the quarterly GDP numbers we’ve gotten under Trump and the unemployment rate was already “tremendously” low when he took office.
But in that “very good brain” of his (resting as it does beneath that rusty Brillo pad he wears on his head), we’re witnessing the most spectacular stretch of economic growth the world has ever seen, and in the event surging oil prices imperil that, he’s exceedingly unlikely to look in the mirror when it comes to finding fault.
For their part, the Saudis indicated they’d step in to stabilize the market in the event any missing Iranian barrels ended up driving prices “too” high. The following ran on state-run SPA after Trump made his announcement on Iran:
The Kingdom of Saudi Arabia is committed to supporting the stability of oil markets after the U.S. decision to withdraw from Iran nuclear deal. The kingdom will work with major producers and consumers within and outside OPEC to curb the effects of any supply shortages.
But again, you’d be forgiven for casting a bit of a wary eye at that. Riyadh reportedly wants $80/bbl at least and possibly even $100, in order to, among other things, drive up the valuation of the Aramco IPO. Needless to say, that risks emboldening previously uneconomic U.S. supply which in turn imperils market share, but that might be a gamble to Kingdom is willing to take.
Or maybe not, because coming full circle, comments out of Al-Falih this morning were apparently the direct result of Trump’s express desire to see lower prices. In case you missed it, here were the headlines that hit at roughly 5:30 New York time:
- FALIH: LIKELY TO BE A GRADUAL OIL SUPPLY BOOST IN SECOND HALF
- AL-FALIH: LOOKING AT VARIOUS SCENARIOS FOR BOOSTING SUPPLY
- FALIH: LIKELY TO BE A GRADUAL OIL SUPPLY BOOST IN SECOND HALF
- FALIH: ANXIETY LEVEL OF CONSUMERS NOW `IS A CONCERN TO US’
He said all of that following a meeting with Novak and while the initial move lower was material, it accelerated meaningfully throughout the day:
Here’s a bit of additional color from the Bloomberg piece linked here at the outset:
It wasn’t just the U.S. Other major buyers of Saudi crude also put pressure on Riyadh to change course, albeit a little more diplomatically than Trump. Dharmendra Pradhan, the Indian petroleum minister, said he rang Al-Falih and “expressed my concern about rising prices of crude oil.”
OPEC officials were in a meeting at the opulent Ritz-Carlton hotel in Jeddah on Saudi Arabia’s Red Sea coast when Trump tweeted his views and they immediately saw it as a significant intervention.
“We were in the meeting in Jeddah, when we read the tweet,” OPEC Secretary General Mohammad Barkindo said on Friday. “I think I was prodded by his excellency Khalid Al-Falih that probably there was a need for us to respond,” he said. “We in OPEC always pride ourselves as friends of the United States.”
Obviously, there are more questions than answers here. Al-Falih and Novak were short on specifics ahead of the OPEC meeting, which is less than a month away. Additionally, it’s hard to imagine investors fully discounting the geopolitical risk.
And then there’s the Aramco IPO and Riyadh’s ambitious domestic agenda that needs funding.
Whatever the case, the Saudis just slammed the brakes on crude. So much for Iran’s theory about Trump working with unnamed OPEC co-conspirators to engineer higher prices and so much for the longs who were betting on the surge continuing unabated.