President Trump is fracturing OPEC.
Trump’s tweet over the weekend that Saudi Arabia agreed to add 2 million barrels per day (mb/d) of supply confused the oil markets, pushing prices down a bit on Monday. Most analysts dismissed the statement, concluding that Trump was confused when the Saudis told him they have 2 mb/d of spare capacity, and not that they had planned to bring that capacity online.
A few days on from that episode, however, it actually doesn’t look that black and white.
Indeed, Trump’s tweet suggests that he very much believes that 2 mb/d of Saudi supply is coming online, and despite the attempt by the Saudis to clarify, by stating that they have surplus capacity waiting to be used in the event of a pinch, the statement was interpreted in different ways by the oil market.
After all, the point of Saudi Arabia’s spare capacity has always been to ensure market stability, so it doesn’t seem as if there is any major change in policy. On the other hand, many oil market watchers viewed the statement as Saudi Arabia’s tacit agreement with the Trump administration to ramp up supply when Iranian oil goes offline.
Recent data suggests that Saudi Arabia already began ramping up production way more than it said it would under the OPEC+ agreement even before the meeting. The agreement called for a return to 100 percent compliance, which would translate into an increase of 600,000 bpd to 1 mb/d. Saudi officials suggested the upper end of that range was almost a formality, and the lower figure would end up being what was likely.
But even as Saudi Arabia worked hard to maintain the cohesion of the OPEC+ group, it quietly ramped up output in June. Estimates vary, but here are a few numbers that we have to go by. Bloomberg estimates Saudi output jumped by 330,000 bpd in June to 10.3 mb/d. Reuters says production surged by much more, rising by 700,000 bpd to 10.7 mb/d. If the latter is true, production would stand at close to the all-time high of around 10.7 mb/d. Related: The New Oil Cartel Threatening OPEC
Looking forward, Bloomberg and Reuters both report that Saudi Arabia won’t stop there, and instead will ramp up to 10.8 or 11 mb/d in July.
The numbers are significant because they would suggest that even as Saudi Arabia cobbled together a reasonable deal in Vienna, it had plans to blow through the ceiling that it was committing to. In other words, OPEC+ agreed to add 1 mb/d, but Saudi Arabia alone is poised to increase by that amount.
Many OPEC members are already crying foul, accusing Saudi Arabia of doing Trump’s bidding. It isn’t clear that Saudi Arabia will go as far as increasing by 2 mb/d, as Trump wants, but the promise to plug any supply gap is a not-so-subtle acknowledgement that Riyadh is ready backstop Washington’s plan to shut in Iranian supply.
“We think that Trump’s interventions are more likely to unsettle than reassure the oil market,” Standard Chartered wrote in a note. “The comments carry the implicit suggestions that supply deficits will require all of the world’s remaining spare production capacity to come online; that US oil policy is based primarily on the use of Saudi spare capacity to fill any gaps created by other US actions; and that the US assumes there is as much as 2mb/d available promptly.”
Iran is firing back, arguing that if Saudi Arabia produces above its 10.06 mb/d quota it would breach the OPEC+ agreement. Iran also issued a veiled threat to disrupt Saudi shipments in the Strait of Hormuz. Related: The Most Overlooked Renewable Energy Source
With the oil sectors of so many OPEC members wounded, they are largely powerless to stop Saudi Arabia from pursuing its own course. Plus, with Russian cooperation, Saudi Arabia no longer sees the utility in restraining its ambitions to adhere to the wishes of other OPEC members.
Thus, the aggressive anti-Iran campaign from Washington – a campaign that Riyadh supports – is driving a wedge between OPEC members. "Putting aside the fact that Saudi Arabia has no such capacity to bolster its crude output, this demand could be inferred as an order for the kingdom to walk out of OPEC," Iran’s OPEC governor Hossein Kazempour said, referring to Trump’s request for 2 mb/d of Saudi supply, according to S&P Global Platts.
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Leaving aside the wisdom of burning through the entirety of global spare capacity, or whether Saudi Arabia will actually go that far, the seeming willingness to comply with Trump’s request for more oil, which will come at the direct expense of an OPEC member, could fracture the cartel. OPEC could continue to exist on paper, and it will continue to meet, but Saudi Arabia and Russia (and to a lesser extent, a few Gulf States) are the only ones coordinating oil market policy. This dynamic has been underway for the better part of two years now, but President Trump is accelerating these changes.
By Nick Cunningham of Oilprice.com
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Of course there will be division within OPEC:
Trump's decision to leave the Iran nuclear deal and impose sanctions along with recent calls from U.S. Energy Secretary Rick Perry for all to not import any Iranian oil, all in addition to Trump's calling upon Saudi Arabia to increase production means that Trump has given Iran's market share to Saudi Arabia and of course, his allies in Russia.
I've said this before and I'll say it again:
Iran will leave OPEC as member and Russia will replace Iran within OPEC.
But Trump has upset leaders all over the world since he took office.
He creates division within every entity the U.S. and other global leaders were a part of before he took office. He's upset leaders from Germany, France, the U.K., Mexico, Canada, China...and he has done very little to improve conditions within North Korea.
So, let's just all remember that the United States is now more divided than ever before, and, not surprising considering Trump is close to destroying his third marriage. Questions, anyone?
OPEC has seen its clout ebbing and flowing since it came into existence 78 years ago but it has continued to play a pivotal role in the global oil market. OPEC accounts for 71.8% of the world’s proven oil reserves. In 2017 it accounted for 42.6% of global production and 10% of the world’s consumption. Its achilles’ heel, however, is Saudi Arabia’s policies on prices and levels of production which are mostly inspired by US geopolitical and economic objectives. Saudi Arabia has been America’s Trojan Horse inside OPEC for years.
President Trump has shown his ignorance of the machinations of the global oil market when he tweeted that Saudi Arabia will add 2 million barrels a day (mbd) to the global oil supplies.
There are many myths being promoted about the current situation in the global oil market.
The first myth is that US sanctions will lead to the loss of 1 million barrels from Iran’s oil exports. Nothing is further from the truth. Iran will not lose a single barrel of oil as a result of US sanctions. Iran’s trump card is the petro-yuan which has virtually nullified the effectiveness of US sanctions. Major customers like the European Union (EU), China, India, Turkey, Russia and Japan are still committed to continue importing Iranian crude. If the EU countries succumb to US pressure, then China and the petro-yuan will come to the aid of Iran with the energy business between them projected to hit $40 bn a year. Given the current tense political and trade relations between the US and China, the Chinese will be more than happy to oblige. Moreover, Iran now may rely on a fleet of Chinese supertankers, properly insured, to export its own oil.
The second myth is the Saudi claim that it can produce at least 12.5 mbd if needed. Such claim doesn’t stand scrutiny. Saudi Arabia’s oil production peaked at 9.64 mbd in 2005 and has been in decline since. Saudi production never exceeded 10.4 mbd before with almost a million barrels of which came not from actual production but from stored crude oil on tankers and on land. Saudi Arabia is only able to raise its oil production by 400,000 b/d being the amount it cut under the OPEC/non-OPEC production agreement. Even the 400,000 b/d will come from stored oil and not from real production. One then reaches the logical conclusion that if Saudi Arabia doesn’t have the capacity to produce 12.5 mbd under any circumstances, then its claim that it has a spare production capacity of 2 mbd is highly questionable.
OPEC’s promise of restoring 1 mbd to the market will in effect translate into less than 600,000 barrels a day (b/d).
And despite current outages in Venezuela, Libya, Nigeria and Canada, it is my considered view that the global oil market has not re-balanced completely. There is still a small glut in the market capable of taking care of these outages. The proof is that oil prices have been hovering around $73-$78 a barrel for the last three weeks rather than surging far beyond $80.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London