President Trump this morning hit oil markets with an unexpected tweet that railed against OPEC for “artificially very high” oil prices that “will not be accepted.” Some have dismissed this as politics or an attempt to divert attention away from investigations or legal woes. Oil prices dropped 40 cents after the tweet.
In our view, Trump’s tweet is much more strategic than these simple assessments and may have a major unexpected impact on oil markets and OPEC’s plan for higher prices.
The central focus of the tweet is the upcoming May 12 deadline to issue another waiver for Iran oil sales. There are two key takeaways for the market: 1) If there was any doubt, it is another signal that Trump intends not to issue the waiver and instead reimpose oil sanctions on Iran; 2) We believe Trump is trying to get ahead of the blame game for high oil prices as a result of his decision to renew US sanctions on Iranian oil sales. He want to establish that OPEC production cuts are responsible for higher oil prices and not his policies.
Indeed, some of the recent increase in oil prices is attributed to the market realization that Trump will likely reimpose oil sanctions on Iran. We are told Trump has been fully briefed on potential oil price impacts from the decision to reimpose sanctions. In addition, he is surely reading near-daily mainstream (non-energy) press articles on the Iran sanctions deadline that highlight a possible spike in oil prices.
We think it would be a mistake to write off this tweet as a crazy one-time Trump comment that doesn’t really mean anything. Instead, we think the market and OPEC should prepare for continuing pressure and possible actions to address high oil prices from the Trump administration.
First, Gulf producers who agree with Trump’s position on the Iran nuclear deal should expect continued pressure from Trump about high oil prices. In particular, we believe Trump will lean on Saudi Arabia and other Gulf allies to help with any supply disruption from Iran sanctions by increasing production. We don’t think this was in the Saudi or OPEC playbook as they were planning to enjoy a period of higher prices due to geopolitical risk. And of course, Saudi Arabia would like to see higher oil prices for the Aramco IPO and increase investments in capacity and the sector.
Second, a sharp increase in oil prices as we head into the high demand season may trigger the Administration to release oil from the Strategic Petroleum Reserve (SPR). This is another action that the market and OPEC would not be expecting absent the Trump tweet and his sudden interest in high oil prices.
Some market observers assign Trump’s tweet to a populist impulse about rising gasoline prices. While we think that is plausible, we don’t think it is the case. Gas prices are up about 30 cents from a year ago but after several years of low prices at the pump, modest increases in prices are not yet a big issue in voter land. We also don’t think there has been a significant amount of press coverage of rising gasoline prices that might have caught Trump’s attention. Of course, if there is a big spike at the pump, we would expect Trump to engage on the issue. We just don’t think it was the motivation behind the tweet this morning.
Lastly, higher oil prices support energy jobs and investment in the US, and we are sure that Trump is hearing from Continental Resources CEO Harold Hamm and other key supporters in the sector to tread carefully.
