Last week, oil was back in the spotlight after the Trump administration decided not to extend waivers on imports of Iranian crude when they expire on May 2.
The decision marked the latest escalation between Washington and Tehran and came hot on the heels of the (probably ill-advised) decision to designate the IRGC as a terrorist group.
Crude initially surged, as news that the exemptions would not be extended threatened to squeeze a market already grappling with the unfortunate situation in Venezuela and, more recently, escalating violence in Libya, where Khalifa Haftar is angling to depose the country’s UN-backed government, reportedly with the blessing of the White House.
Read more on the Iran waivers decision
‘The Timing Is Much More Sudden Than We Assumed’: World Reacts To Trump’s Latest Iran Escalation
Of course oil was already sitting near its highest levels since November, thanks to OPEC+’s efforts to rescue the market after Q4’s harrowing collapse and on the back of the broad-based rally in risk assets in the new year.
The initial spike early last week was a stark reminder for the US president that the “maximum pressure” campaign on Iran isn’t generally consistent with the long-standing push for lower prices at the pump. Trump famously engineered last year’s oil price collapse, and one assumes OPEC learned something from that episode. Indeed, it was the initial decision to allow the waivers on Iranian crude imports in November that catalyzed another leg lower for prices. Gamma effects tied to producer hedges and a rumored blow up in a nat gas/WTI spread trade made things worse. By the time OPEC met in December, the bottom had fallen out completely.
On Friday, perhaps sensing that the Iran decision threatened to push prices back to last year’s highs, Trump told reporters he had “called up OPEC.” “I said ‘you’ve gotta bring em down. You gotta bring em down'”, the president remarked, recapping what, by most accounts, was an imaginary conversation.
Saudi Arabia and the UAE are apparently committed to helping keep a lid on prices, but it’s still not entirely clear how excited they are about having to step in. To be sure, Riyadh is pleased with Trump’s efforts to isolate Tehran, and Prince Mohammed owes Trump a solid for the administration’s invaluable assistance in covering up the Khashoggi murder, but at the end of the day, one has to wonder whether the cartel’s patience for Trump’s Twitter bombast is wearing a bit thin.
In the context of the above, it’s worth noting that the positive correlation between oil and stocks could mean Trump’s tolerance for higher prices is, well, higher than it might otherwise be.
“The current correlation between the S&P 500 and oil is strongly positive”, JPMorgan’s Marko Kolanovic wrote Monday, adding that “this is useful to know, as it may impact the actions of the US administration.”
(JPMorgan)
Trump is, for a variety of reasons, pot-committed to sanctions on Iran, but he’s famously sensitive about domestic equities. By almost all accounts, the president views the stock market as a real-time barometer of his performance (which is ironic considering his base is hardly comprised of voters who own large quantities of financial assets), so to the extent oil is positively correlated with equities, rising crude prices might not be viewed as an entirely pernicious development.
“Given that higher oil helps the S&P 500 go higher and likely does not hurt the economy, and given that part of the high gas prices are due to state taxes, the US administration may tolerate higher oil prices despite the recent rhetoric”, Kolanovic goes on to write.
That, in turn, suggests Trump might be inclined to keep pushing the envelope on Iran, irrespective of how oil behaves. Part of the positive correlation between equities and crude is doubtlessly attributable to the “reflation” narrative being good news for risk assets at a time when demand fears and generalized concerns about the global economy still weigh heavily on investor psychology.
One potentially vexing issue, though, is the interplay between oil and inflation. While policymakers are free to “look through” volatile crude prices if they choose, consumers are not, unless they don’t want to drive. Ironically in this context, Stephen Moore – who continues to insist on “immediate” rate cuts – favors monetary policy pegged to commodity prices.
In any event, to the extent the performance of equities is tethered to the nascent reflation story of which rising crude prices are a (rough) expression, and considering Trump’s love affair with US stocks, there are worse things right now that buoyant oil if you’re the White House.
