Are Oil Markets Too Tight For Trump?

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By Nick Cunningham

Oil prices jumped to their highest level since November this week, and the Trump administration deserves a lot of the credit.

Sanctions on Iran and Venezuela together have combined to knock huge volumes of supply offline over the past year. At the time of this writing, data on Venezuela’s oil exports were not readily available, but one of the country’s main oil export terminals was reportedly set to resume operations after being forced offline because of a widespread electricity blackout.

However, it’s safe to assume that problems with the oil sector continue. Reuters reported that two storage tanks at the Petro San Felix heavy oil upgrading unit exploded on Wednesday. Estimates vary, but some analysts say that the electricity outage crippled oil exports, dropping them to perhaps 500,000 bpd, down by half from just a few weeks ago.

Meanwhile, the sanctions on Iran are also knocking supply offline, but maybe not as much as Trump had wanted. The Trump administration is aiming to slash Iran’s oil exports by about 20 percent by May, according to Reuters, putting exports below 1 million barrels per day (mb/d), down from over 2.5 mb/d last spring.

Reuters reported that the U.S. is likely to grant extensions on waivers to most of the eight countries that obtained them last year. In exchange, they have to reduce imports from Iran. The U.S. is aiming to get exports below 1 mb/d, down from roughly 1.25 mb/d currently.

But the effort noticeably stops short of cutting Iran’s exports to “zero,” as top U.S. officials repeatedly discussed last year. “Zeroing out could prove difficult” one source with knowledge of the deliberations told Reuters. The source added that a Brent price of $65 was “the high end of Trump’s crude price comfort zone.” Brent topped $68 per barrel during midday trading on Thursday.

President Trump hates high gasoline prices more than he hates the Iranian regime. The U.S. backtracked on its bellicose position last year when Brent surged above $80 per barrel just ahead of the implementation of sanctions. It’s doubtful that this time would be any different. Cutting Iran’s oil exports to 1 mb/d is a much more attainable goal than zero.

Importantly, the U.S. won’t have the help of Saudi Arabia this time around. Riyadh ramped up oil production to 11 mb/d last year, adding more than 1 mb/d in new supply in the months leading up to sanctions. When the U.S. backtracked, prices crashed because the market was suddenly not as tight as everyone had expected.

Having been burned by Trump, the Saudis are unlikely to be as amenable to his demands for more production. “The way that the Saudis were misled by the U.S. president concerning Iran sanctions is something that they can still taste,” Ed Morse, head of commodities research at Citigroup, told Bloomberg. The difference the tone coming out of Riyadh between 2018 and 2019 is stark. Last year, the Saudis tried to soothe the market, repeatedly reassuring everyone on adequate supply. They, along with their partners, abandoned their production cuts to avoid price spikes.

 

Now, Saudi Arabia not only got everyone in the OPEC+ coalition to recommit to production cuts, but Saudi Arabia has pledged to cut 0.5 mb/d more than required. And they will keep those cuts in place through April at least.

There are very few tools the U.S. has that can satisfy the administration’s competing objectives of isolating Iran and Venezuela while also maintaining low gasoline prices. One tool is the NOPEClegislation, which would open up OPEC members to antitrust action by the U.S. Justice Department.

OPEC officials reportedly made it very clear to U.S. shale drillers in Houston this week that if NOPEC becomes law, it could be very bad for the shale industry. The NOPEC bill could make it difficult for OPEC to engage in coordinated production cuts, which could mean that they return to producing at maximum levels. Not coincidentally, major U.S. oil groups, such as the American Petroleum Institute, are lobbying the U.S. Congress not to pass the bill.

Still, the legislation gives Trump a bit of leverage over the Saudis, although it’s not clear that it is enough to convince them to ramp up supply.

The other factor that could help the Trump team isolate Iran and Venezuela while also heading off a price spike is U.S. shale supply, although the White House doesn’t exactly have any influence over this dynamic. U.S. shale is still growing quickly, although there are signs of a slowdown.

U.S. Secretary of State Mike Pompeo spent time in Houston at the IHS CERAWeek Conference, urging shale drillers to do all they can to boost output. He characterized American oil companies as pivotal to U.S. foreign policy. Indeed, in the context of U.S. sanctions on Venezuela and Iran, what happens West Texas is essential. But again, Pompeo can’t do much to influence what is already occurring in the shale fields.

Pompeo surely wishes he could. Just days ago, the EIA downgraded its forecast for U.S. oil production for this year and next. The agency also reported a surprise drawdown in inventories, an indication that the market may not be oversupplied after all.

Reports that the U.S. is moderating its position on Iran sanctions, perhaps only aiming to get Iran’s oil exports down to 1 mb/d as opposed to zero, is a clear recognition that the oil market is tightening to the point that the Trump administration feels constrained in its foreign policy objectives.

Crude Oil

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