The best kind of Trumpian dilemmas are those that pit multiple variants of Trump against one another, and there is no better example of this highly absurd dynamic than the US president’s oil “strategy”/”strategery“.
Last year, Trump (conceptualized as a single entity) had an extraordinarily difficult time coming to terms with the market ramifications of “Iran hawk Trump”‘s foreign policy choices. Those choices – which included pulling the US out of the nuclear deal and setting about crippling Tehran’s oil revenue – risked driving up prices at the pump.
Higher gas prices, in turn, chanced negating some of the gains that were assumed to accrue to US consumers from the tax cuts, a situation that carried non-negligible political risk.
So, “OPEC bully” Trump was forced to intervene with shrill demands to ramp up production ahead of the US midterms and, ultimately, actual phone calls to King Salman in Riyadh (see here and here).
Here’s an annotated visual of one man’s verbal assault on an inanimate commodity as it played out from the time the US left the nuclear deal, to oil’s peak in September:
During his speech to the U.N. General Assembly, Trump accused OPEC of “ripping off the world.”
In the end, Trump was successful at engineering a veritable collapse in prices. After badgering OPEC to increase production, he then blindsided everyone with a series of waivers regarding US demands that allies cut imports of Iranian crude to zero by November. Between that and concerns about the global economy, oil plunged. Midway through November, gamma effects tied to producer hedges and a blowup in a WTI/nat gas spread trade exacerbated the plunge.
Read the entire “death blow” saga
Optionsellers.com Blows Up As Crude, Natural Gas Turmoil ‘Capsizes’ Clients
Death Blow! WTI, Nat Gas Bet Gone Awry Is ‘Patient Zero Stress Point’
Trader: Crude, Nat Gas Moves Due To 1-800-GET-ME-OUT Moment For A Large Hedge Fund
Goldman Blames Oil Collapse On Momentum Chasers And Gamma Effects
On the heels of the collapse, OPEC+ stepped in to support the market.
Fast forward five months and with prices pushing back towards last year’s highs, the US has decided not to renew the waivers on Iran oil imports when they expire on May 2. That potentially sets the stage for prices to run further, especially when considered in conjunction with ongoing turmoil in Venezuela and renewed fighting in Libya. Once the exemptions expire early next month, importers will have to cease dealing with Iran or risk US sanctions.
Here’s a statement from Sarah Huckabee Sanders:
This decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue. The U.S., Saudi Arabia and the United Arab Emirates, three of the world’s great energy producers, along with our friends and allies, are committed to ensuring that global oil markets remain adequately supplied.
The move cements the administration’s “tough on Iran” stance and comes hot on the heels of the controversial decision to designate the IRGC as a terrorist organization. Iran’s economy has already suffered mightily and this will, presumably, ratchet up the pressure further.
The risk, as ever, is that it galvanizes domestic support for the regime’s characterization of the US as a nefarious foreign bully. In November, Steve Mnuchin penned an Op-Ed in an effort to convince everyday Iranians that they are not the target of the crackdown.
Countries who received waivers five months ago will now have a choice to make, although really, it’s not a choice at all. China isn’t amused. “[Our] cooperation with Iran is open, transparent, reasonable and legitimate, and should be respected”, Beijing said Monday.
Again, this is not a risk-free proposition. Oil is coming off its best quarter in a decade and this has the potential to push prices higher still, especially to the extent it suggests the Trump administration is prepared to get even more aggressive when it comes to going after Tehran.
Last month, Iran’s exports were roughly 1.3 million b/d, down sharply from some 2.5 million b/d a year ago.
“[There will be] no waivers beyond the May expiration, full stop”, Mike Pompeo said Monday, adding that both the Saudis and the UAE are “working directly with Iran’s former customers”.
It’s also worth noting that this has the potential to push up inflation in oil importing countries, something that’s likely to be reflected in FX.
There are a lot of “ifs” in this equation, especially in the context of OPEC+’s deliberations about how to proceed following the December cuts, but one thing is for sure, the rush to notify the public that the Saudis are there to ensure adequate supply is a testament to the notion that the Trump administration is calling in favors following the White House’s steadfast refusal to acquiesce to Congress’s demands that Prince Mohammed be held accountable following the Jamal Khashoggi debacle.
I’m not sure what you want to call this, but here it is anyway:
Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil. Iran is being given VERY BAD advice by @JohnKerry and people who helped him lead the U.S. into the very bad Iran Nuclear Deal. Big violation of Logan Act?
— Donald J. Trump (@realDonaldTrump) April 22, 2019
Just last week, Trump issued the second veto of his presidency, blocking a resolution to end US support for the Saudi-led campaign in Yemen.
While the Saudis are obviously on board with anything that curtails the expansion of Iran’s regional influence, there are worse things for the Crown Prince than higher oil prices. If Riyadh does in fact endeavor to keep a lid on crude at the behest of the White House, it will prove (again), that it pays to have friends in low places.
Read more
