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Alt Text

What’s Stopping An Oil Price Rally?

Oil prices rallied in Q3…

Alt Text

Is OPEC Considering Deeper Output Cuts?

You could argue OPEC and…

Can Trump Send Oil Prices Soaring?

Drillers well

In its latest monthly oil production update, OPEC reported that its crude oil output increased by another 240,000 barrels a day in October to 33.64 million barrels a day, a new record high, with Nigeria, Libya and Iraq driving the supply boost and with total production about 1 million barrels higher than the plateau agreed upon in Algiers at the end of September.

(Click to enlarge)

As a result of OPEC's relentless increase in total output, the cuts OPEC would need to enforce to reach the Algiers output target just get bigger and bigger...

(Click to enlarge)

... most of it is as a result of soaring Iranian oil exports - by roughly 1 million bpd - since the easing of sanctions by the Obama administration:

(Click to enlarge)

It is also the reason why oil has continued to slide in recent weeks, as the upcoming OPEC production cut (or even freeze) - which will have to be shouldered almost entirely by Saudi Arabia due to production cut exemptions granted to other states, most notably Iran - has lost almost all credibility with the market.

Suddenly, however, there is a ray of hope in OPEC's dark world, and it comes courtesy of president-elect Donald Trump, who just may eliminate as much as 1 million barrels of OPEC oil output, or the cartel's entire excess production, should he undo the Iran nuclear agreement, which is extremely unpopular in GOP circles.

Recall that Trump's stated number one priority from his pre-election circuit has been to dismantle the "disastrous" Iran deal - although as Bloomberg notes, his to-do list might have changed since saying that back in March. And, as Bloomberg's Julian Lee calculates, confirming our math from just right after the Algiers (non) deal, tearing up the Iran nuclear agreement would remove almost a million barrels a day of supply at a stroke: a million barrels is about the same size as the cut OPEC needs to make.

The next question: can Trump actually undo Obama's landmark Iran nuclear agreement? According to Lee, the answer is yes, "despite assertions to the contrary from Iran's President Rouhani and a slew of analysts." Here's how:

The Joint Comprehensive Plan of Action, as the deal is snappily titled, wasn't ratified by Congress, but brought into force by President Obama via executive order. Trump could rescind that. The fall-out would be messy, but it could be done (in theory). Related: Shell Tops Ranks Of Ideal Oil, Gas Employers

There is a second way as well, enshrined within the agreement itself. The dispute resolution mechanism allows any signatory to refer a perceived breach of the deal's terms to the joint commission created to oversee the accord. If the complaining party isn't satisfied with the outcome and believes the breach constitutes "significant non-compliance", it can refer it to the U.N. Security Council. The Security Council would then vote -- and here's the killer blow -- - not on whether to re-impose sanctions, but on whether to "continue the sanctions lifting."

That might not sound like a big difference, but it's critical. By framing the vote this way, the U.S. could, in theory, veto the resolution. All the U.N. sanctions on Iran would then be re-imposed.

Should Trump proceed down this path, it would leave only EU sanctions, which prohibited the importing of Iranian oil into EU countries. And while one might expect a European backlash against unwinding the deal - after all it would remove much of the marginally cheapest oil available to European refiners - it may not be very effective, because as BBG adds, "the tortuous process of re-establishing Iran's oil trade with Europe shows that only too clearly."

Although there were willing buyers and a very willing seller, the difficulty came in finding insurers who would underwrite the transactions, or shippers to carry the crude. All the big re-insurers had at least some U.S. involvement and they were extremely hesitant to pick up the business -- even with the apparent backing of the Obama administration. They would drop the business like a scalding hot potato if the new president killed the deal. End of Iranian oil flows to Europe. Related: The Catastrophic Consequences Of Peak Oil Demand

And it wouldn't be just Europe: Asian buyers, who in the past were threatened with the loss of access to the U.S. banking system to persuade them to cut their purchases of Iranian, promptly abandoned Tehran supplies. They likely would again.

Sure, there would be a reciprocal response, as any attempt to end the deal by Trump would prompt Iran the retaliate and abandon its own commitments. Coming shortly before Iran's presidential election in May, it would be a huge boost to Tehran's hardliners. In Bloomberg's estimates, "you'd expect life to become more difficult for the Americans in Iraq, where it's engaged alongside Iranian-backed militias in ousting Islamic State from its last stronghold in the country - another Trump priority."

Ironically, such an act by Trump would make him Saudi Arabia's best friend overnight: should the president-elect remove the burden from the Kingdom to cut its own production by as much as 1 million bpd and shift it to Iran, whose output would be forcibly cut, the Saudis would not only preserve their market share, but enjoy the price of crude soaring back into the mid to upper $50-range. As such, it is unclear if Trump would enjoy being perceived as a hardliner on Iran, yet one who indirectly helps support the nation that has been the most vocal supporter of the Clintons, Saudi Arabia.

Finally, and speaking of the public, any escalation between the Trump administration and Iran which would send oil prices higher, while great for U.S. oil, would be frowned upon by U.S. motorists, who would have to pay more at the pump. The decision who to please will ultimately be Trump's to make.

By Zerohedge

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  • Jack Ma on November 15 2016 said:
    Interesting read. Thanks much.

    The motorists will not complain as 100 million of them will be driving to a new job in the energy field. Higher gas prices are better for everyone (like eating vegetables for health) and Trump wants oil at 150 as the USA becomes a net exporter of oil. The only way to do this is to take ME oil offline - Iran oil in Euros maybe. Demand will rise each year anyway plus we have a 500 billion cap x shortfall that will drive prices higher in a year as well.

    Higher oil prices also mean that nations must order dry bulk goods and build more products to sell for dollars that in turn must be used to buy higher oil prices to come until the last breath of the petrodollar is dead. The BDI is rising now as can be seen. Shipping is picking up.

    The only way out of the deflationary spiral is higher prices so this is what Trump will do. He will not uses oil as a weapon and let the price remain low to inflict pain on Russia and the other BRICS.

    Trump not evil like the last 4 neocons president puppets to Soros destroying the USA from inside of Washington for the last 20 years. Soros will live long enough to see his open society concepts closed. Pay back time for that old wrinkled up vampire. :)

    IMHO
  • Futher More on November 15 2016 said:
    Just like in the movie the Godfather, you could see the rebels heart to their cause. I think it will be very possible for ISIS to feel really threatened and before the US takes 'their' oil as Trump has said previously, they will start blowing out rigs, pipelines, etc before letting them go.
  • zorro6204 on November 15 2016 said:
    I suppose it's possible, it was a lousy deal in the first place, but Europe so wanted to do business with Iran that it would be difficult to enforce any sanctions. We could cancel our part of the deal, but Germany and France? No way, not even if they paraded a bomb down the streets of Tehran.

    Other than that, it seems likely by taking regulatory handcuffs off the oil industry, that Trump could make things worse, by increasing US production.

    A really interesting idea might be for some oil exec to whisper in his ear that low prices were hurting our industry and increasing imports from the Middle East. What if Trump put a $60-65 floor on oil prices, a reasonable compromise between consumers and industry, and taxed imports on the different between that level and the actual import price (exempting Canada). The idea would be to encourage North American energy independence. Probably illegal in several respects, but it would be interesting. Wouldn't that be the kind of program that would find favor in the Trump mind?
  • Jay on November 15 2016 said:
    It would be silly for Trump to take sides of Saudi Arabia who played dirty oil price war with US. Their dirty tricks backfired and landed them in soup. Iran is perceived as enemy all the time not sure why when Saudi is clearly the one sponsoring terrorism!
    And by the way, Trump actions are not gonna be taken before January 21st then what is the reason of the sudden oil price rise? What silly traps are being laid to fool the investors and loot them on a large scale?
  • EH on November 15 2016 said:
    Amazing! How's your knees,, would you do me for BUCK or two as well?
  • PAPA on January 12 2017 said:
    I think the neocons in the white house worked alongside Iran and Saudia Arabia and the american oil companies that build their oil industry, in order to cause a rise in oil prices once Trump enters office. For example, the Iran deal is clearly something Trump will get rid of, the Israel deal in the UN as well which will anger the Arab world, not to mention the fact that Obama created ISIS... I think Obama set up a playing field for Trump, on purpose or not, so that any wrong move in the middle east on his part, will light the whole place on fire. Hence, bullish for oil.

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