OPEC Deal Hangs In The Balance As A Lukewarm Iran Still Irritated At Trump

I would say a production rise is a done deal. The bigger question is more where it leaves OPEC going forward.

That’s from Saxo Bank’s Ole Hansen, who spoke to Bloomberg Friday about the OPEC deal. “Closer cooperation with Russia, however, is likely to offset any negative impact of Iranian and Venezuelan protests”, he continued.

Over the course of the week, Iran has generally adhered to the combative tone they struck last weekend when it comes to whether it makes sense for the cartel and Russia to effectively acquiesce to Donald Trump’s demands when it comes to increasing output.

Trump’s domestic and foreign policies – ostensibly both manifestations of the same “America first” doctrine – have a tendency to trip over each other and this situation is no different. Crude prices benefited from his decision to pull America out of the Iran nuclear deal and John Bolton’s presence in the national security apparatus only serves to embed an even higher geopolitical premium.

The problem with an inexorable rise in crude prices is that it imperils the gains that are assumed to accrue to U.S. consumers from the tax cuts. If prices at the pump keep rising, well then that eats into tax savings and wage gains at a time when Americans still identify “high cost of living” and “oil/gas prices” as the top two biggest risks to their financial situation:

(BofAML, from the bank’s most recent “Word From Main Street” survey)

The optics aren’t great if you’re OPEC and Donald Trump is tweeting about how you’re “at it again”.

About six weeks after Trump’s infamous April tweet, Bloomberg reported that “the U.S. government quietly asked Saudi Arabia and some other OPEC producers to increase production by about 1 million barrels a day.” Behind the scenes pressure is fine to the extent it lets Riyadh know what Trump is thinking without putting the Saudis in a position where the entire world knows that their decision calculus is being dominated by one variable: the U.S. President, who has a habit of sanctioning other producers, notably, Riyadh’s mortal enemy in Tehran.

Thanks to Trump’s tweets, the Bloomberg reporting was just confirmation of what everyone already knew, and the overt way in which Trump delivered the message (i.e., by blasting it out to the entire world in 140 characters, complete with an exclamation point) made it damn near impossible for OPEC to obfuscate when it comes to conjuring up a rationale for a supply increase. You can cite all the data you want, but the bottom line is that everyone is going to know Trump was behind it because he literally said that higher prices are “no good and won’t be accepted” on social media.

So it’s no damn wonder that Iran wasn’t on board with the supply hikes.

But here we are on Friday and after a week of contentious rhetoric and brinksmanship by Zanganeh, it appears that everyone is kinda, sorta on the same page after what he described as a “good meeting” with Al-Falih who wants a 1m b/d increase that would be distributed among producers pro-rata.

The Saudis would implement a third of OPEC’s share of the supply hike. Al-Falih added that output increases would be effective starting at the first on next month and while they would take some time to realize, more oil would be flowing to the market by the end of the summer. Roughly 1/3 of the increase wouldn’t actually find its way to market because some members are constrained in their ability to hike production.

Speaking of members who are thusly constrained, Venezuela Minister of Petroleum Manuel Quevedo said he’s “still looking at keeping the unity of [the] group, and hopes this OPEC and non-OPEC will be a lasting relationship.” He added that he “hopes to recover lost production in Venezuela before year-end, aims to add 1m b/d for 2018.” Go ahead and legit LOL at that.

Getting back to Iran, Zanganeh also said that in his mind, “$70/bbl is a very good price for oil”. He also said Japan has not stopped buying Iranian crude despite U.S. pressure. Oh, and he reiterated this: