OPEC Again Faces Choice Between Trump’s Wrath and Oil Slump

It’s becoming a familiar choice for OPEC: risk the pain of an oil-price slump, or provoke the wrath of President Donald Trump.

After another warning on Twitter on Monday to avoid pushing crude higher, Saudi Arabia and fellow Organization of Petroleum Exporting Countries producers again are faced with a dilemma: suffer a market rout that batters their export-dependent economies or defy the president, who could enforce legislation that shakes the group to its foundations.

OPEC and its allies started a new round of output cuts last month to avert a surplus being created by record U.S. shale-oil output and fragile global fuel demand. Crude prices have rallied more than 20 percent this year, an obstacle for Trump while he exerts diplomatic pressure on two major OPEC nations: Iran and Venezuela.

“Recent history has shown that Saudi Arabia and OPEC cannot disregard pressure from President Trump,” said Bob McNally, president of Rapidan Energy Advisors LLC and a former oil official at the White House under President George W. Bush. “As crude prices edge back up toward politically sensitive levels in Washington, OPEC+ members will consider tempering cuts.”

OPEC showed different responses when faced with the same choice on two occasions last year.

In the summer, when Trump urged the Saudis to open the taps while he imposed sanctions on Iran, the kingdom bowed to his wishes, boosting production within a few months to record levels.

But on the eve of an OPEC meeting in December, Trump’s call to keep production high was disregarded by the group and its allies, who announced an output cutback of 1.2 million barrels a day that they’re now implementing.

Between the two decisions was an event that may again prove critical this time round.

Trump’s administration promised in May that financial sanctions would squeeze Iranian oil exports to “zero,” a pledge it then flouted in November by offering a number of customers exemptions, in order to prevent a price spike. As a result, oil tumbled around 35 percent in the fourth quarter, a heavy blow for the economies of OPEC nations.

Lessons Learned

The organization has learned from that mistake and is unlikely to repeat it, according to two oil officials in the Gulf who asked not to be identified.

“I think they will send this call straight to voicemail given the November experience, and the fact that this has all the hallmarks of a self-inflicted wound,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC in New York. “Trump has sanctioned two OPEC countries and is calling on OPEC now to dig him out of the hole he helped dig.”

Saudi Arabia may insist that, if the U.S. genuinely fears a supply shortage, it should tap its emergency supplies, according to Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug, Switzerland.

“Saudi Arabia is probably going to call Trump’s bluff and ask the U.S. to use its Strategic Petroleum Reserve instead,” said Jakob.

Crude Oil Plummets as President Trump Warns Against High Prices

Nonetheless, the price response on Monday showed that traders are seriously considering the Saudis may at least soften their output cuts. Brent crude futures, the global benchmark, tumbled as much as 3.7 percent to $64.64 a barrel in London.

“We might see a less aggressive stance on supply cuts from the Saudis — this might stop them from cutting deeper,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich.

The risk to OPEC comes in the form of the so-called No Oil Producing and Exporting Cartels Act, or NOPEC, a bill resurrected by U.S. legislators that would make the group subject to the Sherman antitrust law, used more than a century ago to break up John Rockefeller’s Standard Oil Trust.

Congressional support for the bill intensified last year as oil prices neared a four-year high, and Trump publicly blasted OPEC. In the past, the White House has opposed the NOPEC legislation — both George W. Bush and Barack Obama threatened to veto it. OPEC’s concern now is that Trump may break with his predecessors.

OPEC’s course of action will probably become clearer when key members of the group and its partners meet for a review of their accord in Baku, Azerbaijan, on March 18. The whole 24-nation coalition will gather in Vienna for a policy-setting meeting a month later.

Whatever they decide, there will be pitfalls, according to Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt.

“There are no good choices,” said Weinberg.