President Trump in comments made on Tuesday and Wednesday made clear that the US Government is “with Saudi Arabia” and “we are staying with Saudi Arabia.” Trump’s comments came after a CIA briefing on the Khashoggi killing that the President summarized as not having any “definitive conclusion” on the involvement of the Saudi Crown Prince Mohammed Bin Salman (MBS). The full White House statement by the President is available here.
Oil markets seem to now interpret Trump’s support for Saudi Arabia, and by implication MBS, as raising doubts about whether the Saudis will continue with plans to cut oil production in December and in coordination with the OPEC-plus group. The thinking is that Trump’s support may erode if the Saudis cut production and oil prices rise thus putting the Kingdom in a difficult situation.
In our view, not only is this rationale is incredibly off-base, we see exactly the opposite situation that Trump’s strong support gives Saudi Arabia running room to do what it needs to do for its own self-interests on oil market policy.
Nothing we heard this week changes our view that Saudi Arabia will continue with plans to cut production in December nor our forecast of the upcoming December 6 OPEC meeting resulting in a production cut in excess of 1 million barrels per day.
The Saudi energy ministry has already decided to cut production in December by 500,000 b/d and we think there will be a reduction in November from the previous month. There is also a Saudi-led initiative to have an OPEC decision at the group’s December 6 meeting to cut production that some media reports have suggested is about 1.4 million b/d.
In addition to providing unqualified support for Saudi Arabia, Trump’s comments this week also gave the Saudis credit for having “worked with us very well” and “kept prices down.” The timeline here is also important, as it was Saudi intervention and its production boost ahead of the US election that is significant in Trump’s eyes.
Now with the election behind us, we think the pressure is off. While Trump may still express his displeasure with higher oil prices on Twitter, we believe his real concern is the impact of higher prices in an election year. We think the Saudis will provide Trump with sufficient assurances that it will be similarly proactive during the President’s reelection year as it was during the midterms (ie production boosts in June and September/October when prices rose above $80).
In addition, a careful reading of Trump’s official White House statement and his comments to the press before leaving for his Florida trip place much more emphasis on the $450 billion in military and commercial sales contracts with Saudi Arabia for which he takes credit. So in Trump’s mind, there are other issues to continue support for Saudi Arabia than oil prices.
Lastly, Trump also emphasized in his statement and comments that his Saudi support “is about America first.” In his comments on trade policy and other bilateral relations, Trump has often said he sees nothing wrong with other countries placing their own domestic priorities ahead of the global concerns.
Now that we are past the election, we believe Saudi Arabia will now turn to oil market policies that are in its own self-interest – a “Saudi first” policy if you will. Higher oil prices are certainly on the list as it allows them to generate revenue to pay for domestic spending priorities.
However, we would also point out that the Saudi oil ministry is also concerned about the global economy and recognizes that too-high oil prices will also destroy demand. Based on our conversations with sources in the Kingdom, we think the ideal price range for Saudi Arabia is in the $80s, and it would start to get uncomfortable with prices above $90. There is a rub with this range because Trump’s red line seems to be $80 not $90 so there is more to play out here.
Saudi Problems Persist in Congress
While the Trump Administration is back to business-as-usual with Saudi Arabia, there still are significant and growing problems on Capitol Hill. There are discussions about potential sanctions and bans on military sales.
The Senate Foreign Relations Committee Chairman and Ranking Member this week sent Trump a formal letter asking for a Magnitsky Act determination of MBS’ role in the Khashoggi killing that requires by law a White House response within 120 days.
We think you might even see hearings in the new Democrat-majority House of Representatives next year on the Trump Saudi policy and intelligence assessments of the Khashoggi situation.
In our view, Trump will prevent, and veto if necessary, any sanctions that would undermine his policy with Saudi Arabia. We also doubt that Senate Majority Leader Mitch McConnell will allow much floor time for votes on such matters.
While there is potential for additional reputational harm to Saudi Arabia in Congress and by subsequent media coverage, we do not see any congressional or other actions that will impact oil markets.
EIA Weekly Inventory Data Shows Big Boost in Refinery Utilization
Oil prices rebounded intra-day on Wednesday thanks to a significant uptick in refinery utilization data in the EIA Weekly Petroleum Status Report. EIA reported that crude input to refineries increased by 438,000 barrels to 16.855 million barrels that puts it on par (and 17,000 barrels higher) with the weekly data from one year ago. This week’s data is an indication that US refineries are now coming out of a larger-than-normal maintenance season that resulted in lower demand and higher inventories.
The unusual refinery maintenance season was one of the factors we cited in early October when we forecasted a market correction when prices hit $86 and also a factor we cited for our view that prices will rebound later this year.
The other factors we cited include: hard data of significant cuts to Iranian crude exports in November and OPEC’s upcoming decision to cut production going into 2019.
