The Daily Update - Trump and Oil

Brent crude is currently trading ~23% higher ytd. So it came as little surprise that Donald Trump was sufficiently vexed to tweet on Monday: ‘Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!’ Brent crude traded off 3.5% although recovered somewhat on Tuesday with the API report showing US crude inventories declined.

Moreover, subsequent comments from Khalid al-Falih, Saudi Arabia’s Energy Minister, on Wednesday suggested continued supply side discipline following OPEC+’s December decision to cut production by 1.2m bpd from January. He stated ‘The 25 countries are taking a very slow and measured approach. Just as the second half last year proved, we are interested in market stability first and foremost’, and that ‘We remain flexible, I am leaning toward the likelihood of an extension in the second half (of 2019), but that's not automatic’. Helped by these comments, oil continued to recoup a good part the week’s earlier losses, particularly when the EIA data in the afternoon also pointed to further oil market inventory drawdowns.

The next OPEC meeting is in April, the Russian view on the cuts may come into play as the Russians seem comfortable with oil prices around the USD60 per barrel level whereas Saudi Arabia seems to be comfortable with a level closer to USD80 per barrel likely reflecting a higher budget breakeven level in the USD80-85.

We certainly wouldn’t disagree with Trump’s comment that the global economy is looking fragile and OPEC should be mindful of the impact of higher prices on slowing growth and impacts from trade tensions. But at current levels oil is still trading well below the levels ahead of the 2018 US midterm elections when Trump also vocalised his disapproval. Plus, US sanctions on Venezuela and Iran are not helping the supply situation either. Perhaps, the No Oil Producing and Exporting Cartels Act (NOPEC), an antitrust piece of legislation, which having been approved by the House Judiciary Committee is due to be voted on by the full House could offer Trump some leverage. However, Energy Secretary Rick Perry warned on it yesterday saying ‘I think we need to be really careful before we pass legislation that may have an impact that goes way past its intended consequences’.

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