Has Trump Overplayed His Hand With Saudi Arabia?

Authored by Tim Daiss via Oilprice.com,

Last year, President Donald Trump successfully convinced Saudi Arabia to help keep a lid on global oil prices by ramping up production. The Saudis acquiescence to Trump’s tweets at the time were likely appeasement to the president for placing fresh sanctions against Saudi Arabia’s middle eastern nemesis, Iran. Moreover, most concede that Riyadh was a deciding factor in swaying the president to withdrawal from the 2015 nuclear accord with Iran. Consequently, Saudi Arabia’s kowtow to Trumps’ tweets was a returned favor.

However, when Trump later granted waivers that allowed several countries to keep importing Iranian crude, oil prices started their nosedive during the last quarter of the year, catching Saudi Arabia flat-footed, and according to many accounts furious at the president for what they saw as a betrayal of trust.

Now, Trump is tweeting again about high global oil prices and asking OPEC+ to reconsider its oil production cut deal that was implemented at the start of the year. On Monday, the president tweeted “Oil prices getting too high. OPEC, please relax and take it easy. The world cannot take a price hike – fragile!”

However, in order to remove excess oil from global markets, particularly due to Trump’s Iranian oil exports waivers in addition to rampant U.S. production that just hit a once unthinkable 12 million barrel per day (bpd), it’s likely that Riyadh will think twice before appeasing the American president – who at the end of the day appears to lack in-depth knowledge of how global oil markets work

Pushing back against Trump

In fact, in an apparent rebuke of the president, Saudi Arabian Energy Minister Khalid Al-Falih said yesterday that oil inventories in the U.S. are “brimming,” and reducing that glut remains the main goal for the group, adding that the kingdom plans further curbs to output in March.

Oi prices this year have risen around 20 percent recouping much of the losses incurred in the oil price downturn from last October through December. Oil markets are also responding to another Trump intervention, this time fresh U.S. sanctions against not only Iran but Venezuela.

“All of the outlooks that I have seen tell us that we will continue, we’ll need to continue, to moderate production in the second half of this year,” Al-Falih said. Yet, he added that an easing of oil production cuts could still happen depending on the continuation of supply curbs in Libya, Venezuela and Iran. Extending the cuts won’t be “automatic,” he said.

“If we find out that the fundamentals are tightening by June, you can bet that I will be, just like we did last year, encouraging my colleagues within OPEC+ to ease” the cuts and not allow the market to tighten.

Trump’s quandary

The latest Trump tweets and Saudi Arabia’s lack of willingness to be pressured to act over those tweets shows that the president has not only lost leverage with Saudi Arabia in his efforts to keep oil prices, therefore gasoline prices, low as the 2020 presidential election cycle kicks in, but it also shows Trump’s lack of understanding of oil market fundamentals. In essence, for a U.S. president to use social media to try to sway a U.S. ally, and the world’s largest oil exporter, not only diminishes the office of the president but shows that U.S. shale oil production, which has been responsible for a re-positioning of oil market fundamentals, and alliances, also ushering in OPEC+, is not the power in global markets that many hoped it would be just a few years ago. As recently as two years ago, many were reporting that the U.S. would replace Saudi Arabia as the global oil markets swing producers, yet with the formation of OPEC+, namely Saudi Arabia and Russia, that has not yet materialized.

At the end of the day, it would be prudent for Trump to allow oil markets to evolve as they have for decades. Despite recent wild swings in prices to both the upside and downside, markets cycle and eventually return to equilibrium – albeit without Trump’s ill-timed tweets.