President Trump is said to be seething about oil prices rising above $80 on Monday after the OPEC meeting in Algiers over the weekend.
Trump believes he has an agreement with Gulf allies (Saudi Arabia, UAE and Kuwait) to protect a run-up in oil prices in exchange for US sanctions on Iran, which they support.
He used his speech to the United Nations General Assembly on Tuesday to voice his displeasure directly to those Gulf countries in a way that is likely even more impactful than a tweet. In his remarks, Trump 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. Not good. We want them to stop raising prices, we want them to start lowering prices, and they must contribute substantially to military protection from now on. We are not going to put up with it – these horrible prices – much longer.”
We spoke to a senior US energy official Monday who said Trump was indeed upset (he used more colorful language) and was expected to criticize OPEC for the price rise above $80. However, the official we spoke with thought it would come in a tweet and not in the speech itself. Therefore, it appears that Trump personally added the OPEC language in the last 24 hours.
As public evidence of the agreement to offset Iran barrels, we were directed to a press release on the Saudi Embassy website, “Energy Ministry Reiterates: Kingdom of Saudi Arabia Committed to Oil Market Stability.” The press release was released on May 8 - the same day that Trump announced he was re-imposing sanctions on Iran. (See screen grab below.)
We expect that further messages will be passed by other US officials to their counterparts in these Gulf countries that essentially requests more explicit language of additional production to calm markets.
The same official told us that the President may also call King Salman directly if prices do not retreat below $80 in the coming days.
In our Sunday note, we highlighted that the big news came after the Joint Ministerial Monitoring Committee (JMMC) press conference in Algiers when Saudi Arabia’s energy minister Khalid al-Falih told reporters off-stage that Saudi production will rise in both September and October:
“I don’t have my hands on the number (Saudi output). It is above the previous month and in October it will be even higher. We have seen higher demand in October. Our plan is to respond to demand. If demand is 10.9, you can certainly take it to the bank that we will meet. But the demand is 10.5 or 10.6, I think October will be more than this. But I don’t recall the numbers. But October was a healthy number above the last three months.” (Transcript provided by Platts Oil)
We also said in our Sunday note that “we doubt we’ve heard the last on the production message from OPEC’s defacto leader Saudi Arabia - especially if prices rise in the next few days.”
We believe Trump’s latest verbal tirade will spur some further action or messaging from Saudi Arabia and others and think it could come before the end of the week.
One scenario may take the form of a press release from the Saudi energy ministry or Aramco on increased production numbers. We believe oil markets may have reacted differently on Monday if al-Falih had announced that Saudi production in October will be north of 10.6 million b/d at the press conference instead of off-stage.
Another scenario may be greater clarification from the JMMC co-chairs Saudi Arabia and Russia on a specific production hike associated with reducing over-compliance from 129 percent to 100 percent. It is estimated that this number is 500,000 b/d but was not disclosed at the press conference.
As a result, we believe Trump’s aggressive jawboning may be the catalyst for more specific production messages that would be bearish for prices in the very near term (ie before the US election). We also think the US may announce an emergency release from the Strategic Petroleum Reserve in mid-October to aid in this effort. No decision has been made yet but we are aware that the US Department of Energy has plans in place that would be normal operating procedures. This SPR release would be in addition to the already scheduled sale of 11 million barrels before November.
But don’t get us wrong, we see prices rising again in November and December well north of $80 after US sanctions on Iranian oil become effective on November 4.
