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The Fear Factor Is Back For Oil

While fundamentals suggest lower oil…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Is Trump Really Responsible For Lower Oil Prices?

President Trump boasted of low gasoline prices on Wednesday, taking credit for the recent market meltdown.

“People see the job we’re doing. People see that gasoline is way down. And the reason it’s way down is because I called up some of the OPEC people, I say ‘don’t do it.’” Trump said. “And I made calls and I say, ‘you better let that oil, that gasoline flow.’ And they did.”

He repeated that line for emphasis. “I called up certain people and I said ‘let that damn oil and gasoline…you let it flow, the oil.’”

Jason Bordoff, Founding Director at the Center on Global Energy Policy at Columbia University, gave Trump credit for lowering gasoline prices, but for different reasons than the one Trump cited.

Trump’s right that OPEC – mainly Saudi Arabia – increased supply in the second half of last year, which played a pivotal role in lowering global crude oil prices. But he also omitted the fact that Saudi Arabia ramped up production in anticipation of massive supply losses from Iran. As Bordoff notes, the lenient approach that the Trump administration ultimately took, despite lots of tough talk, also surprised the oil market.

Secretary of State Mike Pompeo and Trump himself spent much of last year talking about taking Iranian oil exports to zero. But the waivers issued to eight major importers of Iranian oil kept Iran’s’ oil flowing. South Korea and Japan have even suggested that they could step up purchases of oil from Iran in January now that they have secured waivers from the U.S. government. Related: Trade War Could Persist Unless China Caves

Precise data on Iranian exports is hard to come by, but Iran’s oil production averaged 2.954 million barrels per day (mb/d) in November, down roughly 900,000 bpd from a recent high in May 2018, the same month that Trump announced the U.S. withdrawal from the 2015 nuclear deal. Iranian oil supply has conceivably fallen further since November, but the fact that Iran was still producing nearly 3 mb/d in the month that sanctions went into effect is notable.

Trump now has two major policy goals that are still at odds with each other. He is clearly aware of the domestic political salience of low gasoline prices. He boasts of low gasoline prices when they are low, and he yells at OPEC when they are high. Keeping them low is clearly a high priority.

However, that stands at odds with his strategy of putting “maximum pressure” on Iran. The sanctions waivers are set to expire in May, and U.S. officials have vowed to tighten the noose after displaying leniency in November.

In fact, Trump displayed the “Game of Thrones”-themed sanctions poster at his cabinet meeting on Wednesday, a poster that depicts Trump with the words “Sanctions are Coming.” Ironically, it was at the same meeting that he boasted about how he told OPEC members to “let that damn oil and gasoline flow.” Related: U.S. Gasoline Prices Could Be About To Skyrocket

But those two objectives are contradictory in many ways, and it’s not clear how he squares that circle. Taking Iranian oil exports down to zero would certainly boost global oil prices, just as the expectation of such a scenario drove up prices in 2018.

Adding more confusion to the mix, Trump’s announced U.S. troop withdrawal from Syria also raises questions about where his Iran policy stands. In response to reporters’ questions about how a troop withdrawal might impact Iran’s position in Syria, Trump said “they can do what they want there, frankly.”

But what Trump says is often diametrically opposed to what his administration actually does in terms of policy. Secretary of State Mike Pompeo issued a statement on Thursday, warning Iran not to follow through with its announced plans to launch three Space Launch Vehicles (SLV) in the coming months. Pompeo says they would be a violation of a UN resolution against ballistic missile activity.

It’s hard to read between the lines given the mixed signals. Does the Trump administration still plan on following through with its “maximum pressure” campaign against Iran, which could result in few, if any, waivers on sanctions? Such an avenue could drive up oil prices. Or, has Trump lost interest in Iran, evidenced by his troop withdrawal from Syria and his comments about letting Iran do what they want there? Perhaps he prefers lower gasoline prices to confrontation.

As it often seems to be the case with Trump, there are a lot of data pointing in different directions, allowing everyone to come to their own conclusions.

By Nick Cunningham of Oilprice.com

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  • Mamdouh G Salameh on January 04 2019 said:
    President Trump can't truly claim responsibility for lower oil prices though his foreign policy follies did unintentionally contribute to the slump in oil prices.

    President Trump has been displaying a tendency to claim credit even when his tweets and foreign policy utterances have failed utterly to achieve anything. Notable among these are his claims of victory over North Korea’s missiles, his US sanctions on Iran and soon the end of the trade war with China.

    North Korea hasn’t denuclearized nor has relinquished its nuclear missiles. His sanctions on Iran are doomed to fail. As for the trade war with China, it eventually dawned on him that he can’t win a trade war with China and that his economy has been suffering far more than China’s as a result of the trade war. Out of necessity, he will soon reach an agreement with China to end the trade war. Still, he will declare victory.

    Two major factors in effect contributed to the slump in oil prices between November and December last year.

    The first factor is the realization by the global oil market that US sanctions have failed so far to cost Iran the loss of even one barrel from its oil exports leading the market to realize that there will not be a supply deficit in the market despite projections by a majority of analysts and investor bankers that Iran will lose between 500,000 b/d and 1.5 mbd.

    Moreover, US sanction waivers which were issued to eight countries in November last year will most probably be renewed in May this year if only to be used by the Trump administration as a fig leaf to mask the fact that their zero oil exports option is out of reach and that the sanctions are deemed to fail.

    The second factor is Saudi Arabia’s wrong decision (under pressure from President Trump) and Russia’s (for reasons of its own) to jointly add 650,000 barrels a day (b/d) to the market in June last year thus widening an already-existing small glut.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • GBGoble on January 04 2019 said:
    ? Below $50 a barrel the profit margin is of long term concern.... Production breakeven average is slightly higher. This tends to slow lending/capital for future plays. What effect will this have through 2019 if the oil keeps flowing?

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