OPEC+ (and especially Saudi Arabia) are in a real bind.
On one hand, oil prices are in free fall. And I mean that literally. There have been three separate sessions over the past two weeks during which crude has suffered grievous losses.
Just try to appreciate how remarkable it is that all three of the sessions highlighted with the yellow circles in the following visual played out over the space of just 10 days.
A confluence of macro factors are at play here. Record Saudi production is conspiring with surging U.S. output, global demand jitters (tied to a downturn in the incoming economic data) and the Trump administration’s decision to grant Iran sanctions waivers to eight nations, to deep-six prices.
Of course a bear market in the world’s most financialized commodity doesn’t just happen without tipping some dominoes. As prices careened through key strikes where producers are hedged, dealers were forced to sell oil to stay hedged themselves, accelerating the declines. It seems likely that momentum chasers piled on as well.
As oil plunged into a bear market earlier this month, OPEC+ indicated that they may need to cut production to alleviate oversupply concerns. That news (communicated by delegates after the meeting in Abu Dhabi earlier this month), did not please Donald Trump, who immediately took to Twitter to implore the Saudis to avoid cutting production.
Subsequently, Trump took the extraordinary step of effectively ignoring the CIA’s assessment of Crown Prince Mohammed bin Salman’s culpability in the murder of dissident journalist Jamal Khashoggi.
That effectively cemented Trump’s grip on oil prices – the President went out on a limb for bin Salman and now, Trump wants that favor returned.
That’s the context for a Wall Street Journal article out on Friday which indicates that OPEC is hard at work trying to figure out how to – and this is a quote from the article – implement “a production cut that doesn’t look like a production cut.”
Apparently, the cartel is going to retain current production targets (set in 2016) in order to give themselves some cover with Trump, and assume that the market will read that as an de facto production cut because the Saudis are overproducing anyway.
That, OPEC figures, might be a middle ground that would avoid a scenario where Trump loses his mind while placating nervous markets and thereby avoiding a rerun of 2014 for prices.
Obviously, this is absurd and speaks to just how surreal things have become now that Trump has managed to make himself the key variable in the cartel’s decision calculus.
Whether or not this transparent ruse will be enough to stabilize prices remains to be seen. Do remember that as far as the President is concerned, “stabilization” ain’t gonna cut it. According to Trump, we need to “go lower”.
Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!
— Donald J. Trump (@realDonaldTrump) November 21, 2018
Oh, and then there’s this…