Oil just had its best quarter in about a decade. Naturally, President Donald Trump is complaining.
The real target of this tweet is unmistakably Saudi Arabia, the one OPEC member with enough idle capacity to make a difference to the producer group’s output. It’s also the one over which the U.S. has the most leverage.
Straightforward economic considerations would see Saudi Arabia dismiss the request out of hand, but political calculations make its choice more difficult.
OPEC production fell by around 1.5 million barrels a day between December and February, and probably dropped further in March. Saudi Arabia made by far the biggest voluntary reduction. It contributed almost two thirds of the group’s total output cut as measured against individual baselines in February, and made deeper cuts than it had promised it would implement each month this year.
How things have changed. In 2014, the kingdom briefly adopted a pump-at-will policy, which helped drive prices as low as $26 a barrel in February 2016 and caused U.S. output to shrink.
But the cost to the Saudi economy – and even more so to those of many other OPEC members – was simply too great. Even with record production levels, the kingdom needed higher prices to shield its citizens from economic hardship while it weans itself off a dependence on oil production.
It abandoned the policy when the OPEC+ group – which includes Russia and a few other producers – agreed in late 2016 to manage supply. The policy of restraint is still in effect.
The economic case for continued cuts is compelling, particularly if forecasters start to trim demand growth outlooks. And Saudi Arabia won’t ever admit to following Trump’s orders. However, there are reasons why it might quietly acquiesce to his request.
One consideration is the threat of anti-trust legislation in the U.S. aimed specifically at OPEC, the so-called NOPEC Act. Versions of the bill are moving through both houses of Congress. Previous attempts at enacting a similar law faced presidential opposition, but supporters believe they have a better chance with Trump than they had with his predecessors.
OPEC has taken its case to the U.S. oil industry and its financial backers on Wall Street, warning that the bill could cause the group to stop working and provoke a return to pump-at-will policies – and the first victims of this will be the U.S. shale producers and their investors.
Trump may be more likely to support the passage of the bill if he sees the group refusing to bend to his will on oil production. Of course, there is no guarantee that doing his bidding will offer the Saudis presidential protection from NOPEC, but ignoring him certainly won’t help.
Then there’s his support for Mohammed Bin Salman, who has few friends in high places in the West after the dissident journalist Jamal Khashoggi was murdered in the Saudi consulate in Istanbul in October by agents of the Saudi government. The price to be paid for that continued support may be a more compliant approach to his tweets.
Finally, there is Iran, Saudi Arabia’s rival for dominance of the Persian Gulf and champion of a rival branch of the Islamic faith. Saudi Crown Prince Mohammed Bin Salman would be more than happy to see the U.S. squeeze the nation’s oil exports further by refusing to renew the sanctions waivers that expire in early May. These allowed eight nations, including China, India, Japan, South Korea and Turkey, to keep buying Iranian crude without contravening American restrictions. Tightening the screws on Iran would be easier for Trump if the Saudis replaced the lost output with more of its own oil, thereby helping to contain prices.
Unfortunately for the U.S. president, this is exactly what the Saudis did last year in response to one of his tweets complaining about oil prices, only to be blindsided by these sanctions waivers. The slump in prices between October and December was caused, in part, by Saudi Arabia’s preemptive supply boost in anticipation of blanket U.S. sanctions on Iranian exports that didn’t materialize.
The Saudis could be forgiven for not trusting the U.S. to follow through with much tougher sanctions this time around and preferring to wait and see what actually happens before raising output. Trump’s second tweet in as many months about OPEC policy calls to mind the old adage: “Fool me once, shame on you. Fool me twice, shame on me.” But Saudi Arabia may think it wiser to play along anyway.
Whatever happens, Saudi Arabia’s crude production will probably start to edge up again next month, as domestic needs increase with rising temperatures, even as the kingdom continues to push a policy of restraint. Having done more than they needed to in the first three months of the year, the Saudis have some flexibility to boost output now, if they feel the weight of political pressure from Washington is too heavy to ignore.