Crude oil prices are on the rise. Last week WTI topped $60 a barrel for the first time since Nov 9, 2018 and Brent hit a four-month high at $68.69 on Thursday.
The determination of the Organisation of Petroleum Exporting Countries (Opec) and its allies, Russia included, to continue with their experiment of cutting output to get rid of the glut in the market seems working.
Fresh evidence of the success of Opec’s strategy arrived last Wednesday when the US Energy Information Administration posted a large and unexpected drop in its crude inventories. US stockpiles fell 9.6 million barrels against analysts’ expectations for an increase of 309,000 barrels. The draw was the largest since July 2018 and brought stockpiles to their lowest since January, sending US oil prices higher.
Markets psyche plays a big role in determining crude prices. When Saudi Arabia squeezed its exports to the US, the reasoning was apparent. It wanted to generate headlines; glut is evaporating. And since the US data gets reported every week, it ought to have a big impact on the global psyche, signalling the balance is getting tighter. This was a shrewd move by Riyadh.
In the meantime, the US sanctions against the oil exports of Iran and Venezuela are also sending bullish signals to markets. A stronger dollar also helped the rally.
Rising oil prices at the start of 2018 prompted President Donald Trump to unleash a barrage of strong tweets aimed at Opec. In the wake of the ongoing bullish trend, is President Trump going to embark on his tweet diplomacy again? Most now expect so. “It’s surprising he hasn’t tweeted anything yet,” Matt Smith, director of commodity research at ClipperData told the press.
“You’ve got to believe we’re due for a Trump tweet at some point,” John Kilduff, founding partner at Again Capital was quoted as saying.
Beyond tweeting, Trump could also influence the oil market by renewing waivers to some of the Iranian customers, allowing them to keep buying crude from the sanctioned-country. Opec and its allies are standing guard against the possibility.
Saudis are defiant. Recent history makes them overly cautious. The scenario was similar last autumn too. Sanctions on Iran were getting in place. Markets were tightening. President Trump’s tweet diplomacy was at its peak, asking Opec to restrain its act and not to tighten the markets at a point in time when screws were being tightened on Iranian crude.
The Saudis gave in and bowed to intense pressure from Trump. But then, they were in for a real surprise. Out of blue and without any notice, the Trump administration gave waivers to eight countries. This stunned Riyadh.
Hence the defiance, this time around. When Trump tweeted on Feb 25, that Opec should “relax” its stance on tightening supplies, he was gently rebuffed by Saudi Energy Minister Khalid Al-Falih who favoured maintaining output curbs in the second half of the year. This defiant tone was backed by actions.
Saudi Arabia has now cut production by even more than it pledged and intends to continue doing so next month. “We’re going to see quite a different Saudi Arabia than what we saw in the fall,” Mohammad Darwazah, a director at Medley Global Advisers, told the press. “I don’t think they’re going to be as accommodative (to Trump).”
And although higher oil prices may appear bad for consumers, Trump advisers are now suggesting the US may eventually benefit from high prices. “If the United States becomes an annual net exporter of petroleum, higher oil prices would, on average, help the US economy,” the Council of Economic Advisers said in its annual economic report.
And with growing domestic output, the US clout on crude markets is going up. Washington now seems wanting to exploit it politically, with Secretary of State Mike Pompeo urging the US oil industry to work with the administration to promote US foreign policy interests, especially in Asia and in Europe, and to punish what he called “bad actors” on the world stage.
Pompeo added that America’s new-found shale oil and natural gas abundance would “strengthen US hand in foreign policy.”
The Arabs using oil as a tool of foreign policy is now a page of history. Now it’s the turn of the Americans. What a change in fortunes.
Trump is faced with a tricky situation. Should he squeeze Opec to open taps or should he use high prices to boost the US energy clout? It may not be easy for him to decide.
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