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Trump's Latest Oil Market Gamble

Global oil prices started the week by spiking around 3 percent on reports that Washington was preparing to announce that all buyers of Iranian oil will have to end those imports soon or face U.S. sanctions. Reuters cited a Washington Post article and sources stating that the U.S. will announce the termination of Iranian oil import sanctions waivers on Monday.

The waivers move, granted by Trump in November, shocked global oil markets and created a supply overhang that the OPEC+ group of producers is now working to eliminate. Countries that received 180-day waivers last fall include Japan, China, India, South Korea, Taiwan, Italy, Greece, and Turkey - all of Iran’s biggest oil clients.

Oil prices spike early Monday

Prices for global oil benchmark, London-traded Brent crude rose as much as 3.2 percent in early Monday trading, to $74.30/barrel. It’s the highest price point since November 1. U.S.-benchmark, NYMEX-traded West Texas Intermediate (WTI) crude futures spiked as much as 2.9 percent in early Monday trading, reaching $65.87/barrel - the highest point since October 30 and just before Trump announced sanctions waivers for Iranian oil.

The sanctions waivers put in place by Trump particularly caught U.S-ally, OPEC de facto leader and the world’s largest oil exporter Saudi Arabia by surprise as well. As discussed in my April 20 post, since Trump didn’t consult with Riyadh before granting Iranian oil waivers, it resulted in an uptick in global oil supply and downward pressure on prices, costing the Saudis and other major producers lost revenue. Since that time, Saudi Arabia has largely been immune to Trump’s tweets calling for the Kingdom and OPEC to pump more oil to reduce oil prices which are at five-month highs.

The Reuters report added that Secretary of State Mike Pompeo will announce today “that as of May 2, the State Department will no longer grant sanctions waivers to any country that is currently importing Iranian crude or condensate.”

Other media outlets on Monday morning, Asia time, were also verifying the reports. The London-based Financial Times said that a U.S. official had told them that Pompeo would announce on Monday, U.S. time, and an end to the waivers which expire in early May. Earlier this month, the U.S., took the unprecedented step of branding Iran’s Revolutionary Guard a foreign terrorist organization, the first time formally labeling part of a foreign government as terrorists. These developments underscore Trump’s apparent push to bring the Iranian economy to its knees an in-effect force regime change, a stance not lost on leaders in Tehran who claim that such a scenario is impossible.

Likely ramifications

If Pompeo does carry through with the announcement, it will put considerable upward pressure on global oil prices, even as Trump has recently called on the Saudis and OPEC, via Twitter again, to increase production to bring prices down. It will also likely cause global oil inventory levels to revert to a shortage of the commodity - in effect creating the opposite market scenario that Trump has asked for and needs as the 2020 presidential election cycle kicks in.

However, it’s also possible that Trump is raising the geopolitical ante with Iran, figuring that with the loss of Iranian barrels from the market in addition to the OPEC+ production cut still in place and the loss of barrels from Venezuela and Libya, that Saudi Arabia will be forced to take action and ramp up production. After all, it was the Saudis, according to numerous reports, that influenced Trump to reimpose crippling sanctions against regional foe Iran last year.

Trump could be hedging that he is just calling in a favor again from Riyadh. However, it’s a dangerous gambit since the Saudis don’t’ always follow the same logic as Western leaders, particularly in global oil markets. Case in point: In late 2014, as U.S. oil production at the time was creating a global oil glut, the Saudis abandoned their decades-long role as the market’s swing producer and instead of trimming production to tighten global oil supply and support prices, the Kingdom ramped up production instead to protect market share which within the space of fewer than two years created the worse oil crash in a generation. Prices fell from more than $100 per barrel in mid-2014 to dipping below the $30 per barrel price point in January 2016.

Trump’s move, if the reports pan out, could either be a stroke of geopolitical genius or could amount to little more than a poorly played call that will hurt global oil markets and worse yet for him, dim his chances of re-election in 2020.

By Tim Daiss for Oilprice.com

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  • Alec Bean on April 22 2019 said:
    Trump could also be creating the optics of how tough he is going to get on Iran to trick the OPEC+ to open their taps immediately when in fact he is not going to enforce the sanction once the waivers expire!

    The fact that Al Falih is taking a wait and see attitude and expressing OPEC+ will pump more if necessary shows he doesn't take this surprise announcement at its face value.
  • Mamdouh Salameh on April 23 2019 said:
    If it is confirmed that the United States is not going to renew the sanction waivers it granted last November to the eight biggest buyers of Iranian crude oil when they expire in May 2, then the Trump administration could be forfeiting its objective of keeping oil prices in the lower sixties in anticipation of the US presidential elections in 2020.

    If so, President Trump could be basing his gamble on three factors. The first is hoping to con Saudi Arabia again to raise its oil production to offset a so-called decline in Iran’s oil exports. However, the Saudis may not play ball with Trump again having seen how oil prices lost 43% of their value between November and December last year at very considerable cost to their economy. Saudi Arabia might decide to wait until the global oil market is irrevocably re-balanced and oil prices are headed to $80 a barrel or higher being the price it needs to balance its budget.

    The other factor is Libya. President Trump telephone call to Libyan field Marshal Khalifa Haftar who is battling to take the Libyan capital, Tripoli, could be about securing a bigger oil production from Libya. However, Libyan oil production has been erratic since 2011 ranging from an estimated 300,000 barrels a day (b/d) to almost 1 million barrels a day (mbd) in 2018 with most of the major facilities, oilfields and exporting terminal disrupted from time to time.

    There could, however, be a third factor in President Trump calculations, namely, that he is tacitly admitting that US sanction on Iran have so failed and that a non-renewal of the sanction waivers will have no effect on global oil supplies and prices on the long term. Furthermore, countries which received the waivers last November will not stop buying Iranian crude with or without waivers probably with the exception of Japan and South Korea.

    Without waivers, South Korea and Japan may have to stop importing some 300,000 b/d of Iranian oil. But this will be more than offset by increased purchases by China, India and Turkey and also the European Union (EU).

    President Trump's gamble could backfire badly..

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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