Trump piles pressure on Saudis flummoxed by higher oil price

Monday , July 02, 2018 - 10:25 AM

Anthony DiPaola

(c) 2018, Bloomberg.

If the world’s biggest crude exporter says it’s going to ramp up production, prices usually drop. But as Saudi Arabia adds barrels before its customers get burned, prices have jumped. And Donald Trump isn’t happy.

The president tweeted on Saturday that the Saudi king had agreed to raise production to cut the cost of oil for consumers. While the White House later backpedaled from his assertion, Trump on Sunday compounded the pressure, demanding that OPEC stop what he called its manipulation of the oil market and insisting the group pump more.

Saudi Arabia last month led the Organization of Petroleum Exporting Countries and allies including Russia into a deal aimed at cooling prices. While sticking to a 2016 agreement limiting output, they decided to pump more to offset lost supply from Venezuela and Libya. Brent crude has gained 3.2 percent since then, due to those lost barrels and Trump’s call for allies to stop buying from Iran. The benchmark dropped 1.8 percent to $78 a barrel at 10:37 a.m. in New York.

“Saudi Arabia is under massive pressure,” said Jaafar Altaie, managing director of consultant Manaar Group in Abu Dhabi. “The Saudis would prefer a gradual increase in oil production that won’t shock the market. They prefer keeping prices between $70 to $80 a barrel. But for political reasons they need to react to Trump’s demands.”

Trump tweeted ahead of OPEC’s June 22 meeting that he hoped the group would add barrels, following up on a message he sent in April during an earlier producers’ meeting. China, the world’s biggest oil consumer, and India, the country with the fastest-growing appetite for energy, added their own complaints after prices rose.

“OPEC is manipulating,” Trump said Sunday in an interview on Fox News. “They have to put out another 2 million barrels in my opinion” to make up for the coming shortfall in Iranian crude due to sanctions, he said.

Saudi Arabia has already begun adding oil to the market. Crude exports from the kingdom jumped last month to the highest since March 2017, reaching 7.47 million barrels a day on average in June, compared with 7.15 million barrels a day in May, according to oil tracking data compiled by Bloomberg.

Iran, OPEC’s third-largest producer, lashed out at Trump’s interventions and Saudi Arabia’s accommodating responses. OPEC should reject the U.S. call for a production increase that is “politically motivated against Iran,” Oil Minister Bijan Namdar Zanganeh wrote in a letter dated June 30 to the OPEC president. An increase in any nation’s output beyond limits that OPEC set in 2016 would breach the agreement, he said.

“The deal’s over,” said Robin Mills, chief executive officer of consultant Qamar Energy in Dubai. “It is a real blow to OPEC, in part because of the impression the Saudis are following U.S. bidding, but mostly because Saudi Arabia and Russia had stitched up a deal to raise production anyway even before the meeting.”

Trump’s comments could also complicate the planned sale of shares in Saudi Arabian Oil Co., Manaar’s Altaie said. The initial public offering is the centerpiece of the kingdom’s strategy to diversify its economy away from oil, and the government says its could generate $100 billion.

The U.S. president’s involvement “adds to the problems that already exist in such a huge and complex IPO,” Altaie said. “It furthers the impression there’s a lack of independence in the company and makes it look like Trump is setting Saudi oil policy.”

Saudi Arabia, which pumped 10.03 million barrels daily in May, could tap some of its 2 million barrels a day of unused production capacity to stabilize markets. But adding that full amount of crude would create a glut and could cause prices to plunge, according to analysts at Wood Mackenzie and Qamar’s Mills.

It could also backfire, by deepening the divisions between geopolitical rivals Saudi Arabia and Iran and spooking markets that look to the kingdom as the world’s producer of last resort.

“More oil in the market has to be bearish,” Mills said. “But in the longer term, there’s the countervailing issue of spare capacity that could turn out to be bullish.”

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