Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
President Trump shocked the oil traders, OPEC and just about everybody else when he tweeted on Saturday that he had “Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & dysfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to (sic) high! He has agreed!”
Obviously if that was true, that the Saudi had agreed to raise production by 2 million barrels a day, that would cause a sharp drop in oil in the short-term but would be very bullish in the long-term because a move like that would basically remove most of the world’s spare oil production capacity. In fact, if the White House and President Trump had not backed off that tweet, the oil market would have opened 3 dollars a barrel lower instead of the dollar lower it opened on Sunday night.
Yet, the White House clarified the statement saying that what King Salman bin Abdulaziz was saying was that his country has 2 million barrels a day of spare production capacity “which it will prudently use if and when necessary to ensure market balance and stability, and in coordination with its producer partners, to respond to any eventuality.”
Yet, what this tweet really does is show just how tight the global oil market is. From an oil glut just a few years ago, with a ton of underinvestment and complacency, the industry failed to respond to signs of growing demand. If the Saudis really were to raise output by 2 million barrels of oil a day it would only be a short-term fix. The Increase would cause a big price drop initially. Yet the price drop would increase demand. Then we would have no viable options for meeting that demand. Spare oil production capacity is already at a historic low.
In fact, the price increase that we have seen in crude is the best mechanism for moderating demand. A short-term surge in oil supply would at this point be counterproductive. It would only ensure an even tighter market in the future.
On ‘Sunday Morning Futures’ with Maria Bartiromo on the Fox News Channel, President Trump was asked “In terms of oil prices, you’ve talked about oil prices a lot, do you think somebody’s manipulating this market, up above $70 now? TRUMP responded 100%. OPEC is, and they better stop it, because we are protecting those countries, many of those countries. OPEC is manipulating, and you know they allowed less than we thought last week, they must put out another 2 million barrels in my opinion, because we don’t want that happening. Don’t forget the one negative to the Iran deal is that you lose a lot of oil, and they got to make up for it. And who is their big enemy? Iran. OK. You think of it. Iran is their big enemy, so they are going to have to do it. And I have a very good relationship with the king and with the crown prince of Saudi Arabia and with the others around and they are going to have to put out more oil.”
So, President Trump is using his leverage with the Saudis saying you must replace Iranian oil because we have got your back against your nemesis. The Saudis of course must look like any move they make is within the boundaries OPEC and Russia has set. Iran Oil Minister Bijan Namdar Zanganeh said any production increase above limits agreed to by OPEC would “breach” the deal, according to a letter he sent to OPEC President Suhail Al Mazrouei and distributed by the Iran Oil Ministry’s news service Shana. OPEC should reject the U.S. call for a production increase which is “politically motivated against Iran,” he said, as reported by Bloomberg.
Shale oil production is also leveling off due to logistical and pipeline and labor constraints. Baker Hughes reported a drop in the number of active oil and gas rigs in the United States today. Oil and gas rigs fell by 5 rigs, oil rigs decreasing by 4, and the number of gas rigs decreasing by 1.
So the Tweet by President Trump is not what it was originally thought to be. The fear that high gas prices may hurt Republicans is in the background. If you blame OPEC 100% then it is not the Republicans fault. But I think Trump should own the high price! He should explain the reason prices are going up is because of the strong economic growth that we have seen because of his economic policies of tax cuts, low unemployment, and near record consumer and business confidence. That is the real factor driving prices. That and the false perception that the oil glut that we had was going to last forever. Underinvestment due to economic pessimism that was the hallmark of the last Administration. We warned about the coming shortage of oil years ago but no one was listening, Can they hear me now?
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