Trump Aims To Break OPEC

Jul. 18, 2018 12:07 AM ETUSO, OIL-OLD, UCO, SCO, BNO, DBO, DTO, USL, DNO, OLO-OLD, SZOXF, OLEM, OILK, OILX117 Comments

Summary

  • The Saudi position on oil production and prices has changed dramatically.
  • President Trump has pressured the Saudis to cool oil prices.
  • KSA has little choice but to appease Trump.
  • KSA's relationship with the U.S. is much more important than its OPEC relationship with Iran.
  • NOPEC legislation and SPR drawdowns may finally break OPEC.

The Saudi position on oil production and prices has changed dramatically in just a few months. The most obvious and direct reason has been pressure from President Trump to cool oil prices, coupled with the U.S.'s withdrawal from the Iran nuclear deal and threat of sanctions.

In February, Saudi Energy Minister Khalid al-Falih had said:

If we have to err on over-balancing the market a little bit, so be it... Rather than quitting too early and finding out we were dealing with less reliable information... Stay the course and make sure that inventories are where the industry needs them.” Three officials from Saudi Arabia told Reuters they would be happy to see oil hit $80 or $100 a barrel.

On June 30th, President Trump tweeted:

Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction 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 high! He has agreed!”

The White House clarified that the King told Trump that KSA has 2 million barrels of spare 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.” Separately, it was reported that Saudi sources have said that July’s production will be around 11 million barrels per day (mmbd), up about 1 million from its quota under the OPEC+ deal.

The U.S. is attempting to apply the greatest pressure possible on KSA’s chief rival, Iran, while providing security to the Saudis. In March, Saudi Crown Prince Mohammed bin Salman (MbS) visited the White House on his three-week “charm tour” to London, New York, Washington and San Francisco in search of investors. His message was that it is safe to do business in Saudi

This article was written by

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Harvard College, Economics (Honors), BA

Undergraduate thesis: "OPEC Pricing Strategy."

Harvard Business School Case Study: "Industrialized World and Oil."

Stanford University Graduate School of Business, MBA


I founded Boslego Risk Services and became a recognized expert in the area of energy price risk management (hedging) and trading, providing oil and natural gas hedging strategies to major oil companies such as Exxon, Shell, Mobil, Chevron, Texaco and Phillips; to the national oil companies of Norway, Venezuela, Mexico, Canada, France and Italy; to major users of energy products, such as Delta Airlines, United Airlines, Burlington-Northern Railroad, and Canadian Pacific Railway.


I also provided frequent market assessments and recommended trading positions to major trading firms, such as Enron, Phibro, Sempra and Vitol, and to large hedge funds.


As the recognized expert in energy hedging, I was selected by the former president, John Treat, of the New York Mercantile Exchange (NYMEX) to write the chapter on hedging in his book, Energy Futures (1990, 2000).



Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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