White House Oil Machinations Fail... Again

White House Oil Machinations Fail… Again

by | published May 1st, 2019

If the pundits are to be believed, crude oil prices have been moving down because of two factors:

  1. A “technical” adjustment after a huge rise, and
  2. The latest attempt by the White House to jawbone OPEC into raising production.

However, both are a result of the same underlying event – a Trump declaration that there would be no further waivers allowing countries to import Iranian oil.

Impending sanctions against end users of Iranian crude once again brings into focus a likely constriction in supply, and the significant rise in oil prices last week resulted from traders adjusting contracts in advance of the sanctions.

Of course, we have been here before…

How the White House Lowered Oil Prices

Last October, shortly before the sanctions were to be applied, Washington exempted the eight primary importers of Iranian oil.

The decision effectively undercut the main impact of the sanctions for a 180-day period.

That period ends tomorrow, May 2.

This time around, the White House must deliver on the sanctions or lose all credibility on the Iranian front. Yet, the broader attempt by Trump to entice additional production from others (read: OPEC) will be unsuccessful.

As I have also noted in Oil & Energy Investor on several previous occasions, the Trump move in October infuriated global producers, especially Saudi-led OPEC and Russia. That’s because, in anticipation of a dive in Iranian exports, others ramped up volume to make up for an expected decline in aggregate supply.

However, following the unexpected waivers, the global market quickly became oversaturated leading to a collapse in oil prices. It took several months to rectify, with OEC-plus (OPEC plus Russia) cutting production to raise prices.

That price decline was significant.

Between October 3 and December 24, West Texas Intermediate (WTI), the benchmark crude rate used to set futures contract prices in New York, dove from a high of $76.41 a barrel to a low of $42.51 (a contraction of 44.3%).

The more widely used Brent international benchmark set daily in London had a similar decline. Between October 3 and December 27, Brent went from $86.47 to $52.02 (down 39.8%).

Closing yesterday at $63.83 and $72.78, respectively, neither benchmark has returned to October levels, but have been recovering.

That move up has been intensifying since the Trump “no waiver” declaration last week.

And his attempt to force Saudi Arabia and others to ramp up production has fallen on deaf ears.

The White House Must Turn Things Around

The trajectory remains up, in spite of the White House attempt to suppress price rises. The motivation now (and back in October) is to increase oil supply, thereby lowering market prices for refined oil products like gasoline and diesel.

But as we advance to the primary driving season in the U.S. (traditionally beginning by Memorial Day and closing sometime after July 4), gasoline prices have been spiking.

My OPEC contacts are strongly of the opinion (one I just as earnestly share personally) that the Trump move in October was a deliberate attempt to produce a glut of crude, resulting in lower oil product prices just before a crucial U.S. midterm election.

Some of those contacts have vowed to me that OPEC will not again succumb to Washington’s machinations essentially directed to improving domestic partisan political positioning.

As expected, the market reaction following the latest Trump sanctions announcement was to push prices higher. That was then followed by the Trump tweet attack on OPEC to cut production and an anticipated decline in prices.

But that’s where the similarity ends…

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OPEC’s Defiance and Its Effect on Oil Prices

Unlike last time, Saudi Arabia and OPEC are holding their ground.

Their response has been a clear declaration that production cuts are not going to be rolled back anytime soon. Even with its own export balance in the mix – compounded by a current crisis brought about by crude oil contamination leading to a suspension of European imports of Russian Urals Export Blend – Moscow has signaled that it will abide by the OPEC+ cut arrangements.

The environment is in marked contrast to last October. All other producers (including Saudi Arabia, other OPEC members, Russia, Kazakhstan, and Mexico) know that there is ample room to have it both ways.

This is due to the combination of Iranian and Venezuelan sanctions from the U.S., civil war in Libya, rising civil unrest in the Niger Delate production zone area in Nigeria, and nagging difficulties in maintaining field extractions on other countries.

That is, OPEC+ can increase production and exports knowing that the rising volume will not have a significant adverse impact on international prices – and, thereby, export revenues.

In the medium-term (as much as 12 to 18 months out), U.S. crude oil exports will be able to take up more of the supply deficit. However, until then, U.S. exports are approaching the ceiling of effective port and infrastructure capacity.

The World Turns Its Eyes to Venezuela

With sanctions against Iran and Venezuela (more on this one in the next edition of Oil & Energy Investor), the U.S. has painted itself into a corner.

The Iranian sanctions must now be delivered upon. Anything short will dramatically reduce how the world regards what comes out of Washington.

Those sanctions are also coming into force against a hard pushback from European allies.

When it comes to what is unfolding in the streets of Caracas and elsewhere in Venezuela, another “Pandora’s jar” (a jar, not a box – look it up in Hesiod) has been opened.

This one has people pouring out into the streets while a government with the strong support of Russia and China stands in opposition.

Another challenge to U.S. credibility.

Both are now poised to support higher international oil prices, but the cost in geopolitical uncertainty may be high.



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