OPEC has ‘Trump’ card in price war with US

OPEC has ‘Trump’ card in price war with US

/ Policy & Regulations / Thursday, 08 November 2018 10:20

US President Donald Trump is undoubtedly one of the most outspoken and controversial political figures of the 21st century. Since sweeping a sensational election victory in November 2016, Trump has emerged as one of the most divisive presidents in US history.

His nationalistic rhetoric continues to resonate with his patriotic voter base and many US political commentators firmly believe he is well-positioned to be re-elected in 2020, despite the seemingly never ending controversies that have plagued his administration.

His presidency has sparked multiple protests all across the United States, and there have been calls for his impeachment due to his alleged involvement with Russia interfering with the US Presidential election in 2016.

Trump has been on the offensive since taking power in the Oval Office, and became embroiled in a trade war with China. For years, Trump had been expressing his dissatisfaction with the trade agreements in place with its fellow economic superpower China, and claimed that the United States was getting a ‘bad deal’.

He has also taken issue with NAFTA, (North American Free Trade Agreement) which is a free trade zone between the US, Mexico and Canada.

Trump vs. OPEC

His combative style of leadership has ruffled the feathers of many political leaders globally and he has also now become embroiled in a very public war of words with OPEC.

OPEC (The Organization of the Petroleum Exporting Countries) is an intergovernmental organization that was established in 1960 and has fifteen members, with Saudi Arabia serving as its de facto leader. Trump has been very vocal in his criticism of OPEC, and the 45th US president has engaged in a sustained campaign via Twitter against the international oil cartel.  

In September, at the U.N. General Assembly meeting in New York City, the former property tycoon took aim at OPEC and stated that the OPEC members were ripping off the rest of the world with high oil prices.

During his address at the headquarters of the UN, the US president said, “OPEC and OPEC nations are as usual ripping off the rest of the world, and I don't like it. Nobody should like it. We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. It’s not good."

OPEC has been reducing its output since January 2017 in an effort to end a punishing oil price downturn that bankrupted hundreds of US oil companies. The reduction in output has inflicted significant financial pressure on crude-producing countries.

Trump has blamed that policy for pushing oil futures into a price range of about $70-$80 per barrel, which has consequentially kept the average gasoline prince in the US, anchored at close to $3 a gallon. OPEC continued to cut output due to production problems caused by political unrest in Venezuela and Libya.

Iran Nuclear Agreement

However, many believe that the current policies in relation to output being pursued by OPEC, is a direct result of Trump’s decision in May to pull out of the nuclear agreement made with Iran by the Obama administration in 2015.

The decision by the leader of the free world to immediately restore sanctions on Iran has increased geopolitical tensions.

Iran is OPEC’s third biggest producer, and members of the intergovernmental organization have closed ranks wagons in an effort to protect Iran, and thus far have ignored calls from Trump to lower oil prices. OPEC has been supported in its standoff with the US by Russia, which is their biggest political ally outside of the group.

In September, oil prices per-barrel reached $80 and Trump issued a threatening tweet insisting that the US would withdraw from protecting countries in the Middle East if they didn’t reevaluate their stance on its oil prices.

Trump tweeted at the time, "We protect the countries of the Middle East, and 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!"

Energy ministers from OPEC and non-OPEC countries met in the Algerian capital of Algiers in September to discuss the current challenges and opportunities in the energy sector. When asked for a response to the US presidents’ demands that OPEC increases its production, the Saudi Arabian energy minister, Khalid Al-Falih, shrugged it off and said, “I do not influence prices.”

The Trump administration decided to increase prices in this summer by telling oil buyers they must cut their purchases of Iranian crude to zero by November 4 or else face U.S. sanctions. The aggressive deadline left the market to wonder whether top exporter Saudi Arabia and other producers can fill the gap left by the anticipated loss of about 1 million barrels a day.

OPEC is remaining firm despite the incessant demands and threats from the US president, and it now begs the question as to what Trump can actually do to force OPEC to reduce its oil prices.

His decision to re-impose sanctions on Iran has appears to have backfired, and many analysts and experts believe OPEC is in total control in this war over petroleum prices that could have a huge effect on the global economy. 

OPEC in control

For all the criticisms that can be charged at Trump, it’s fair to say he doesn’t like to back down when confronted with an issue, especially one with such economic significance on the global stage. Trump has insisted that the US won’t put up with high oil prices for much longer. But what can he do to force OPEC’s hand? Senior Commodity Analyst at Commerzbank, Carsten Fritsch has said that the president’s bullying tactics are ineffective, and that he needs to change strategy if he wants to win this price war with OPEC.

Fritsch said, “I think that instead of bullying OPEC to raise output, he could decide to release the Strategic Petroleum Reserves to bridge a short-term supply deficit.”

The US's Strategic Petroleum Reserves are the largest emergency supply of oil in the world. Some 660 million barrels of oil are currently stored underground in the states of Texas and Louisiana.

Established in 1975 after the Middle East oil embargo, the reserves have been tapped several times, including during one particularly cold US winter in 2000, and after Hurricane Katrina shut down 95 percent of crude oil production in the Gulf of Mexico in 2006.

Germany's second-biggest lender, Commerzbank, argued in a research report to investors that the reserves were “Trump's only real option in his efforts to drive the prices down.”

The ensuing trade battle between the US and China may inadvertently result in a decrease in the demand for oil next year. Trade negotiations between Washington and Beijing are becoming increasingly strained and have already weakened economic growth according to some of the world’s leading economists.

Relations between the two countries are continuing to disintegrate, with the Trump administration taking a particularly hard stance towards telecommunication companies ZTE and Huawei. The former was banned from trading with the US for seven-years, and the draconian measures implemented by the US Department of Commerce pushed the vendor close to collapse.

However, Trump intervened and allowed them to resume trade in the US, but tensions between the two economic heavyweights are at an all-time low. Janet Kong, Head of BP’s trading business in Asia has claimed that the trade spat will cause oil prices to plummet.

As far as taming OPEC, Commerzbank's Fritsch thinks Trump is powerless in the short-term, and that his rhetoric is likely to strengthen the oil cartel's resolve. “It would be difficult for OPEC to raise output as it would risk losing its independence and be seen as Trump's puppets.” He also noted that the US president's latest threat had probably contributed to OPEC members pushing back plans to raise output until their next meeting in December.

What’s next?

US sanctions against importers of Iranian oil have now come into effect and it undoubtedly threatens the crude oil market’s precarious balance and risks a surge in prices. Riccardo Fabiani, a prominent analyst for Energy Aspects, said it remained unclear as to what impact the sanctions imposed by the US on Iran will have on the market.

The analyst said, “In the next weeks, all eyes will be on Iranian exports, whether there will be some cheating around US sanctions, and on how quickly production will fall. The US will target buyers of Iranian oil in order to deprive Tehran of its main source of income.”

Trump knows that going after Iran’s oil money will hit Tehran where it hurts. However, it also means that he is hitting a huge player in the global oil market and that will inevitably have serious repercussions on global supply.

Prior to the announcement of sanctions, Iran was producing around 2.5 million barrels a day in April this year, but the subsequent decision by Trump has turned buyers away. Oil prices have fallen by $15 in less than a month, but the general consensus from analysts and experts is that the sanctions will result in a huge rise in prices - with some warning a barrel of Brent crude oil could reach $100 per-barrel by the end of the year depending on demand.

UBS analyst Giovanni Staunovo said, “Even if the United States grants exemptions, Washington will demand that the volume imported from Iran be significantly reduced.”

The ambiguous position of the US has confused some in the industry. Initially the US said the sanctions were specifically designed to reduce Iranian export to zero barrels, but it has since softened its approach. This was evidenced by the announcement made by Secretary of State, Mike Pompeo, who said that export exemptions in relation to Iran were being made for eight countries, but declined to name which countries had been given exemptions.

Consumer confidence in the US itself could also suffer if rising oil prices translate into higher prices at the pump. “If prices start to rise again or another major producer has difficulties, it could put pressure on the US and lead to new exemptions,” said Fabiani.

Saudi uncertainty

Analysts have projected that other major oil producing countries will ramp up their production in an effort to compensate for the anticipated decline in Iran’s output. However, it has been pointed out that by doing so, they run the risk of hampering their ability to react to any future crises which may arise globally.


Saudi Arabia, as aforementioned above, is the de facto leader of OPEC, and the world’s largest exporter of oil. Officials in Riyadh have declared that they can respond to the Iranian shortfall. However, this has been met with skepticism by many leading market players who think the Kingdom is exhausting its capacities.


Saudi Arabia can produce 12 million barrels a day, but only if it invests. The country currently produces around 11 million barrels a day. “The mantra right now is to go to Saudi Arabia but its exports have remained flat at around 10 or 10.2 million barrels a day,” said Samir Madani, an analyst at Tanker Trackers, which specializes in satellite tanker tracking. “The big increase right now is Iraq at 4.2 million, which I've never seen before,” he added.

The US, which is in the process of becoming the world's leading producer thanks to its shale oil operations, could meet part of the demand, but lacks export capacity, said the analyst.

The Future

Trump is currently on the campaign trail for the mid-term elections in the US. The economy is soaring and thousands of new jobs have been created all over the country. Unemployment is at an all-time record low and GDP has grown by over 3%.

His administration thus far has been a big success economically, but his current standoff with OPEC could have significant economic ramifications for the US and the global economy. His demand for OPEC to reduce oil prices has fallen on deaf ears, and the international oil cartel is unified, and in a very strong position.

US sanctions on Iran are set to cause oil prices to rise, and this war with OPEC is one fight the US president appears to be losing. It appears for now that OPEC has the ‘Trump’ card in this price war with the US, and it will be interesting to see if the notoriously stubborn Trump will alter his approach towards OPEC in a bid to wrestle back control of an industry that fuels the global economy.

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