Last week, Donald Trump attacked the Organization of Petroleum Exporting Countries (OPEC) in yet another extension of what has become a semi-regular war of words over oil prices.
We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!
— Donald J. Trump (@realDonaldTrump) September 20, 2018
Rather than engaging Trump in a twitter battle, the Saudi oil minister, Khalid al-Falih, responded from Algeria on Sunday, after a meeting of the joint OPEC and non-OPEC ministerial monitoring committee. His response to President Trump’s call to increase oil production was an emphatic “not now.”
Specifically, al-Falih and OPEC’s message was that OPEC will listen to President Trump’s calls for increased oil production “if there is a need.” However, oil market fundamentals do not indicate that this need is apparent. In fact, Saudi Arabia said it knew of no refiner that needed oil and was not able to procure it.
Nevertheless, the oil markets and OPEC (and its non-OPEC partners like Russia) are operating in the shadow of President Trump’s tweet and his upcoming sanctions on Iran’s oil industry. Al-Falih rejected President Trump’s claim that OPEC is keeping oil prices elevated, but, at the same time, he told reporters that Saudi Arabia has 1.5 million barrels per day in additional spare capacity that it can bring online. He also explained that Aramco, the Saudi national oil company, is making the necessary preparations to access that spare capacity “within days and weeks” if needed.
The UAE told reporters it is ready to increase production by 600,000 barrels per day and Russia said it could bring another 100,000 barrels per day online. Kuwait said production in the neutral zone, which it shares with Saudi Arabia, could bring another 400,000 barrels per day online by the end of the year. All told, al-Falih said that OPEC and non-OPEC together could increase production by over 2 million barrels per day – if necessary.
What does this mean for President Trump, oil prices and the midterm elections? Technically, President Trump was correct – OPEC is engaging in anti-competitive actions by holding back spare capacity to maintain current market conditions. The President would love for OPEC to flood the market with oil and push oil prices down just as his sanctions take as much as 1.5 million barrels per day of Iranian oil off the market. He’d love lower oil prices as the midterm elections approach. OPEC and Russia, on the other hand, see no need to pressure their infrastructure to produce more oil which the market isn’t calling for, particularly when oil prices are not reliably staying above $80 per barrel.
What this means is that the oil market will remain vulnerable to sudden spikes. It is delicately balanced such that if any additional source of oil supply goes down — from natural disaster, geopolitical turmoil, terrorism or infrastructure problems — prices could spike by several dollars until another source of oil – presumably from Saudi Arabia, the UAE or Russia – comes online. If producers like Saudi Arabia and Russia are telling the truth about their intentions to stabilize the market and their ability to access spare capacities, then we have little to worry about in terms of higher oil and gasoline prices . But, as President Trump fears, that’s a big “if.”