“Good morning, this is your President, coming to you live on Twitter from my bedroom, and I’d like to share some highly confidential, highly sensitive geopolitical news with you that has the potential to dramatically move the market for the most financialized commodity on the planet.”
As you’re probably aware, Donald Trump is battling himself for control of the oil market these days.
I’m just going to pull some quotes from one of my daily columns for Dealbreaker to recount this merry-go-round for anyone who might need a refresher.
From a purely market perspective, the decision to pull out of the Iran nuclear deal posed something of a quandary for the President to the extent it meant traders were likely to embed more geopolitical premium in crude prices, which were already rising.
The higher oil went, the more likely it became that rising prices at the pump would end up eating away at the gains that accrue to U.S. consumers from the tax cuts.
Clearly, consumers are indeed worried (the following visual is from the latest edition of BofAML’s “Word From Main Street” series):
Those concerns “informed” (and I use the scare quotes there because using the term “informed” in the same sentence as the word “Trump” is almost always a paradox) Trump’s push to convince the Saudis to increase production in the back half of the year in order to effectively cap oil prices.
But again, there was more than a little irony there. Trump’s own decision to poke the Iran hornet’s nest was in part responsible for rising oil prices, so the back-channeling to convince OPEC to raise production was yet another example of the administration’s policies working at cross-purposes or otherwise tripping over themselves.
That, in a nutshell, is the backstory.
The OPEC meeting ended with a somewhat convoluted deal and there’s more than a little ambiguity about what the magnitude of the production increase will ultimately be in “real” terms, but on Tuesday, reports suggested the Saudis are planning record output of 10.8 million b/d in July and then on Thursday, tanker-tracker Kpler said Saudi exports rose by 543k b/d to 7.757m b/d in June, to the highest level since 2013. In that same report, Kpler said OPEC exports jumped by 1.43m b/d in June, more than the size of the 1.2m b/d cutback promised by OPEC in late 2016.
But all of that was overshadowed by geopolitical tensions when the State Department said it would ask countries to cut imports of Iranian crude to zero by November 4. The following day, Iran’s OPEC governor Hossein Kazempour Ardebili (who had some harsh words for Trump ahead of the OPEC meeting) insisted that Korea, China, and Japan have said they won’t “go for zero” when it comes to Iranian crude imports. He also said that according to his “understanding”, Europe won’t obey U.S. calls either.
If he’s wrong (that is, if the whole world agrees to Trump’s demands), some folks think oil is headed back to triple-digits.
“At the moment, we cannot say with certainty that the oil market would be able to replace that volume”, JBC Energy said in a note dated earlier this week. JBC went on to say that outside of OPEC, only Russia is in a position to increase output and if the U.S. is “unable to bring more barrels into the international market than is already expected for the next 6 months to a year due to infrastructure bottlenecks, triple digit oil prices are not off the table.”
You can see how the dip in prices occasioned by Saudi Arabia’s comments late last month about production hikes has been completely erased on the heels of renewed tensions with Iran:
So that brings us to Saturday morning and the following tweet from Donald Trump:
Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!
— Donald J. Trump (@realDonaldTrump) June 30, 2018
That, frankly, is nuts.
For one thing, that increase would (as far as I know) be above the higher end estimates going into the OPEC meeting. In other words, he seems to be suggesting that Saudi Arabia will itself increase production by more than what the most aggressive analysts were predicting from OPEC+ headed into the meeting. That’s to say nothing of what the actual agreement ended up tipping.
“Although OPEC gave no figures in its communique about the output increase and ministers offered contradictory estimates, Al-Falih said the total hike from the cartel and its allies — including Russia, Oman, and Kazakhstan — would be ‘closer to 1 million than to 600,000 barrels a day'”, Bloomberg reminds you.
Now, Trump is apparently suggesting that Saudi Arabia is going to double that figure by itself. Here’s Bloomberg’s Brian Wingfield, with his assessment of this:
If Saudi Arabia were to respond to Trump’s request, it would stretch the world’s spare production capacity to the limit, meaning that any supply outage could have an outsized effect on oil prices. It would likely aggravate other OPEC members, such as Iran and Venezuela, which initially sought to prevent any increase as OPEC, along with allies led by Russia, headed into their Vienna meetings.
The other thing about that tweet is that it has clear market implications. Smart people can debate how consequential that number actually is, but what’s not debatable is the idea that Donald Trump is tweeting out sensitive information with the potential to move markets. I cannot imagine that Riyadh knew he was going to tweet that this morning although if they didn’t expect it, they should have learned better by now.
Finally, this is a clear effort to try and convince everyone that they can safely comply with America’s demands to cut Iranian crude exports to zero without having to worry about the ramifications for prices and/or supply.
In any event, you now have sensitive, actionable market information – if only you could trade on it.