- The oil market rally isn’t justified as Donald Trump touts a far-away supply cut.
- Even if Trump’s tweet becomes a reality, demand for oil has evaporated.
- A substantial recovery is still a long-shot in today’s environment.
U.S. financial markets appear to have short term memory loss, and Donald Trump is once again using Twitter to take them on a roller coaster ride.
Oil prices spiked after the president claimed the price war between Saudi Arabia and Russia was coming to an end. The rally looked set to continue on Friday as Trump prepared to meet with industry big-wigs later in the day.
Yet Russia denied having had any talks with Saudi Arabia and went as far as saying no talks were planned. Saudi Arabia called an emergency meeting with OPEC+, a glaring reminder that a Saudi cut would have to be coordinated with the rest of the world’s oil-producing nations.
Trade War Cycle Emerges in Oil Prices
Does this feel familiar? It should. It’s exactly how the trade war with China played out just a few months ago.
Every few days, Trump would tweet something to move markets. Later, that tweet was either proven false or buried under bad news. The market found itself on a perpetual cycle that drove share prices crazy and ended with the U.S. and China essentially in the same position as before the trade war began.
Donald Trump is beginning that cycle again, but this time it’s playing out in oil markets.
There could be a modicum of truth to Trump’s bold statement that a 15 million barrel cut is coming— but modicum is the operative word.
Although the Saudis could come back to the negotiating table, they’re only willing to cut production to 9 million barrels per day (bpd). And they’re only offering those cuts if Russia will reduce its own production by 500,000 bpd.
Imagining that scenario plays out, that’s a cut of 3.5 billion bpd.
Complicated Negotiations Ahead
Even that meager supply pullback looks like a long-shot. Saudi Arabia’s decision to convene an emergency OPEC+ meeting suggests as much.
To broker a deal between the Saudis and the Kremlin, the 14 members in OPEC would also have to agree to a cut. But that’s not where it ends – the rest of the world’s producers would also have to be on board.
That kind of negotiation would take more than just a few days— especially considering some of America’s own producers are likely opposed to that idea.
The U.S. shale industry is already on shaky ground. Does the president really think he can convince hundreds of privately-owned companies to get on board with production cuts?
Tangled Web Emerges
Investors aren’t the only ones confused by Donald Trump’s bizarrely specific timeline— Bloomberg reported that the president’s advisors in the White House were equally surprised by his tweet.
A second person familiar with the situation said Trump’s goal is purely aspirational and will ultimately hinge on whether Saudi Arabia and Russia can reach a deal.
One option the president may have at hand to curb U.S. production is a cap on exports. That would give Trump a bargaining chip in negotiations with the rest of the world’s producers and reduce the supply glut.
But that would come at a political price for Mr. Trump, whose “America First” agenda has been celebrating energy dominance in the U.S.
The Oil Market Is Getting Ahead of Itself
You wouldn’t know it from watching the oil price, though. The oil market has responded in force to the potential for a supply cut.
Even in the unlikely case that Trump’s aspirations materialize, coronavirus has wiped out demand for oil on a scale never seen before.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:48 PM