Trump’s OPEC tweet and the changing oil narrative

President Trump tweeted his complaint during the meeting of the OPEC and non-OPEC Joint Ministerial Monitoring Committee in Jeddah on April 20th that “OPEC is at it again” with oil prices that are “artificially Very High!” and that ended with a stern “will not be accepted!”.

However, Trump’s tweet bashing barely lasted the day before most oil prices resumed their upward climb. But Trump unpredictability is only the latest chapter in a fast changing, narrative of an oil market “rebalancing” at new equilibrium levels.

There has been speculation that Saudi Arabia is now seeking higher oil price of $ 100 per barrel but Saudi officials dismiss news accounts of this as “fake news.”

However, it is not unreasonable to assume that OPEC’s largest and most powerful member is now effectively seeking a $70 floor under prices with the upside more or less determined by how far speculation will take prices, or politics cap it – which President Trump may have just tried to do.

The Kingdom’s need for higher near term oil revenues looks to be reshaping Saudi oil policy to spur domestic economic growth and meet the funding of many new international agreements.

A higher oil price would also help offset a lower than expected valuation to the planned Saudi Aramco IPO which is targeted at the $ 2 trillion level.

Eye on fundamentals

The watchful eye on fundamentals is essentially no longer key to near oil policy; instead, Mideast geopolitics, the highly volatile, high stakes developments in Syria, the looming US Iran sanctions waiver and Saudi domestic political considerations and revenue needs are now the primary drivers to near term oil prices.

This will ensure a high degree of volatility in the coming months, including potential downward price movements if some of these geo-political issues do not materialise, as the current high oil prices have already embedded a few dollars of risk premium in them.

Easily among the most successful and consequential macro policies undertaken in the last few years has been the mostly Saudi-driven alliance with Moscow to craft a convincing narrative for the oil markets: a deepening alliance between Riyadh and Moscow that would steer oil prices back up to a true equilibrium level through a well-disciplined agreement on output cuts by OPEC and non-OPEC oil producers.

After successfully bringing oil prices off their lows below $30 a barrel to the current levels of around or above $70, the next chapters of the oil narrative have started to shift.

The prior rhetoric until a few weeks ago was all about a carefully crafted “exit strategy” and “tapering” the output cuts as the glut of global crude oil inventories disappeared and demand rose with the global recovery. By the time of meeting of OPEC’s Monitoring Committee in Jeddah, the rhetoric had shifted quite dramatically.

Output cuts

The Jeddah meeting was in fact largely perfunctory, as no changes were expected in the current plans to run the November 2016 Vienna output cuts to the end of this year.

High compliance was duly noted, though glossed over was the reality that the effects of lower output was almost all due to the near collapse in Venezuelan output that had nothing to do with the quota agreement.

Indeed, Saudi Arabia remains the primary, if only oil producer not only adhering to its lower quota but cutting more than enough to offset slippage above quota levels by others.

Instead, Saudi energy minister Khalid al-Falih lead the way in talking about the need for “new metrics” to “better” measure the supply and demand “balancing” of the oil market, by adding or moving to a seven-year rather than five-year averaging of OECD inventories, or by incorporating a still somewhat vague sense of oil industry investments.

Whatever new metrics OPEC comes up with to justify extending the current output cuts to the end of this year or even into next year, it is more or less a post-hoc justification for higher oil prices in the near term.

Key to the change is the pressing needs of many OPEC and non-OPEC members for higher oil revenues in the near term. The prospects of more Russian and Iranian sanctions, ensures that relatively high oil price ranges has become an unspoken target for the OPEC plus pact.

President Trump’s tweet seems to have been aimed at satisfying his populist consumer base who will be affected by higher gasoline prices, but at the same time the U.S shale industry will be quietly cheering the new oil price narrative as they seek to increase production in this new setting.

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Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.