On Wednesday, I spent more time than I considered ideal documenting the lead up to Thursday’s OPEC meeting in Vienna.
This semi-annual farce is even more ridiculous than usual this time around thanks to the fact that world-renowned commodities strategist Donald Trump continues to tweet out hot takes on what the world (and by “world” he means himself) “wants” and “needs” with regard to oil prices.
Unfortunately, Trump has become a key variable in the cartel’s decision calculus.
That makes an already opaque process even more impenetrable (from an analytical perspective) and in case it wasn’t convoluted enough already, Trump’s move to effectively grant a presidential pardon to Crown Prince Mohammed for the extrajudicial killing of Jamal Khashoggi means he finally has as much leverage on the Saudis as they presumably have on him (It’s reciprocal blackmail! Yay!)
In addition to his incestuous relationship with the monarchy and his shrill, real-time oil market tweets, Trump is also the proud owner of one of the most dramatic plunges in crude prices in recent memory. And when I say “proud” I’m not being sarcastic. Trump badgered the Saudis into boosting production into the deadline for the reimposition of Iran sanctions only to grant exemptions to eight nations (a surprise move that was overtly bearish for prices).
Throw in surging U.S. production and you end up with the conditions for a bear market plunge, which is precisely what we got. And Trump is very – very – proud of his role in engineering that.
On Wednesday, OPEC and allied producers huddled up in Vienna for the usual pre-meeting meetings, and the whisper number on the cut was 1m b/d (see the linked post above for the full story on that).
Long story short, that’s not going to “cut it” (get it?). The market wants at least that much and 1.3m b/d is widely seen as what’s “needed.”
Suffice to say Al-Falih’s Thursday comments prior to the meeting didn’t do oil bulls any favors. “Any production cut from OPEC+ shouldn’t be overly large”, he told reporters, adding that “a reduction of about 1m b/d is adequate.”
I guess that depends on who you ask. It’s certainly not “adequate” as far as the market is concerned and that perceived “inadequacy” showed up in crude, which was down sharply headed into the official meeting.
Falih also said scenarios for cuts ranging from 500k to 1.5m b/d were considered. Not to put too fine a point on it, but if they tried to float that 500k figure, it would sink – and so would prices.
He also said he “has no right” to request the removal of the Iran waivers that helped tank crude last month and hilariously, he contended that he’s “had no discussion with the U.S. on oil price levels.”
That, frankly, is a lie. And so is this (also from Falih): “We’ve not been asked to refrain from a substantial cut.”
Is that right? Well, then what do you call this?…
Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!
— Donald J. Trump (@realDonaldTrump) December 5, 2018
He went on to say that the Saudis are prepared for no deal. “If everybody is not willing to join and contribute equally, we will wait until they are”, he said, flatly.
But the real punchline came when Falih tried to justify his call for a “modest” 1m b/d cut by contending that he “doesn’t want to shock the market.”
Suffice to say the market is already in “shock”, only in a direction that will ultimately be detrimental to the Kingdom’s fiscal position if somebody doesn’t stand up to Trump on the way to announcing the kind of cuts that will be necessary to shore up market sentiment.
In any event, Thursday’s pre-meeting losses were enough to wipe out crude’s December gains.
As Trump would say, “we’ll see what happens.”