Editor's Note: The note below was written by Hedgeye Energy Policy analyst Joe McMonigle. For information on how you can access his institutional research email firstname.lastname@example.org.
We think a close review of the past year would easily demonstrate that one man has loomed large on oil markets in 2018: President Donald Trump. So while media outlets are not handing out Man of the Year awards to Trump, we don’t think it’s a close call for oil markets. Love him or hate him, President Trump had a major and continuous impact on oil markets in 2018, and we expect more in 2019.
Trump’s outsized influence on oil markets as President should not come as a surprise. One of the central themes of Trump’s Presidential campaign was ending the Iran nuclear deal and thus reinstating oil sanctions. In addition, Trump had devoted a whole book chapter to criticism of OPEC. The script for 2018 had already been written.
Ending Iran Nuclear Deal & Re-imposing Oil Sanctions
Certainly, Trump’s biggest impact on oil markets this year stems from his Iran policy. He campaigned on ending Obama’s nuclear deal with Iran – one he called “the worst deal ever.” Shortly after the election and throughout 2017, we wrote notes telling clients that Trump would follow through on nixing the Iran deal and re-imposing sanctions on Iran oil sales. We also forecasted that about 1 million barrels per day (b/d) of Iran oil would get removed from global markets. By our current calculations, Iran exports will be cut by at least 1.3 million b/d in January.
But the market never took Trump seriously on his Iran policy. First, many doubted Trump would actually end the deal - even after he decertified it in the fall of 2017. Their rationale was that Trump just wanted a public relations win but didn’t want to roil oil markets and raise the price at the pump. Second, our forecast of 1 million b/d of Iran crude getting removed from the market was out-of-consensus as most big bank forecasters as well as the IEA/EIA projected a lower range of 200,000 to 500,000 b/d. Their rationale was that Trump’s Iran policy was not supported by the European Union and other countries, like China and India, and therefore the impact of US sanctions alone would not be significant.
For our part, we quickly assessed early in the new administration that Trump himself was the main Iran critic on his team, and moreover, he had a record of checking off campaign pledges from his list (ie Paris climate deal, Obama clean power plan, China trade war, conservative judges). We also projected that US sanctions alone would have the effect of global sanctions. While the European governments opposed US Iran sanctions, they don’t buy oil. Instead, European energy companies were Iran’s oil customers but due to exposure to the US market and financial system, these companies would decide not to cross US sanctions. In January 2018, we wrote a client note that said the Iran nuclear deal was on life-support and would end in 2018.
On May 8, Trump announced the US would pull out of the Iran nuclear deal and re-impose oil and other sanctions in November. The market was finally taking Trump seriously and oil prices hit nearly $80 by mid-May.
One of the best examples of Trump’s oil market manipulations was the State Department’s announcement of waivers from Iran oil sanctions in November. With this move, Trump got to enjoy the best of both worlds. By announcing that only eight countries were receiving waivers, Trump was able to achieve two of his goals: 1) lower oil prices with very little effort; while 2) cutting Iran’s oil exports by more than half this year.
In January, Iran waivers will be reduced to only five and Iran’s exports will be just about 1 million b/d. Trump will have removed about 1.3 million b/d of Iran oil from global markets.
While the Trump team talked about reducing Iran’s oil sales to zero, the market and nearly everyone else did not believe it was possible. The leading reason was that no one thought China would abide by sanctions. We were probably the most bullish about the effectiveness of US sanctions but even we assessed that China would likely keep Iran imports at current levels and just not increase its purchases of cheap sanctioned Iranian oil. The fact that the administration got China to agree to reduce its imports of Iran oil by about 400,000 b/d was a big accomplishment and likely removed more oil than would have otherwise been the case.
Instead, the market moved the goal posts and reacted negatively to the waivers contributing to the oversupply narrative that dominates the oil discussion today. Brent has dropped $20 since Iran waivers were announced on November 5.
Trump Oil Tweets Start in April
OPEC’s Joint Ministerial Monitoring Committee was meeting in Jeddah, Saudi Arabia in late April when ministers were forced to face something new – a tweet from the US President criticizing the group for high oil prices.
Prices had been steadily rising thanks to OPEC’s production cut agreement that had become effective in reducing the glut in global crude storage.
It wasn’t just oil ministers but also reporters and oil market watchers who were trying to understand Trump’s oil price tweet. For context, Brent was at $74 and some on Wall Street and the media were whispering about $100 oil again when Trump tweeted at OPEC on April 20.
At the time, we told clients and reporters that we felt Trump was trying to get “ahead of the oil price blame game” with the tweet. We were told by White House advisers that Trump was informed in briefings on Iran that re-imposing sanctions would likely lead to a rise in oil prices. In our view, Trump was just trying to get ahead and shift this blame in public opinion to OPEC.
Over the next few weeks, oil prices hovered just under $80, and once again, Trump took aim at OPEC with his twitter machine. As OPEC was getting ready for its late June meeting, Trump’s tweet called for a substantial output increase and “need to keep prices down.”
OPEC, led by Saudi Arabia, announced at that meeting it would be reducing overcompliance of the production cut and thus adding about 1 million b/d to global markets. This time oil prices didn’t follow the lead during the summer high demand season and new concerns about spare capacity.
Trump Uses Oil Market Red Phone & Stands by Saudi Arabia/MBS
President Trump took his first international trip of his Administration to Saudi Arabia in May of 2017 and has continued his close strategic collaboration with King Salman on Middle East and oil policies. The President doubled down on his strategic relationship policy by standing by Crown Prince Mohammed Bin Salman (MBS) and Saudi Arabia during the Khashoggi affair this year. For the Saudis, the US has always been a strategic relationship but even more so with Trump.
When oil prices rose near $85 ahead of the July 4th holiday and early October, President Trump reached for his oil market “red phone” to call King Salman to request help in modifying prices.
Trump believes he has an agreement with the Saudis to moderate prices with regard to any impact form Iran sanctions. In the case of the OPEC June 30 meeting, we believe the administration had already coordinated with the Saudis on the action to hike production.
As prices started rising again in September, Trump used his UN General Assembly Speech to directly criticize OPEC for high prices. Then in early October when prices flirted with $85 amid reports that Iran oil exports were already falling by nearly 700,000 b/d ahead of US sanctions, Trump once again called King Salman to request a production hike. This time the request was more urgent as the US mid-term election in November was only about a month a way. Saudi Arabia quickly responded hiking production in October and November up to 11.1 million b/d.
By the time of the US election, Brent was back into the low $70’s, and of course, would eventually crash to the low $50’s due to a sell-off in equities and concerns about the global economy.
China Trade War & Fighting the Fed Impacts Oil Demand Worries
While not directly aimed at oil markets, Trump’s action to launch a costly trade war with China has contributed to concerns about the global economy. Likewise, his criticism of Federal Reserve Chairman Jerome Powell is making the market more nervous about US monetary policy and the economy. The concerns about the global economy and projected slow down in the US economy have provoked additional worries about oil demand. OPEC, IEA and EIA had already revised down global growth in oil demand, and these new economic concerns are an additional contributing factor to weakness in the oil market in the fourth quarter.
More Trump Interventions to come in 2019
Trump – Saudi Arabia Relationship: With the US mid-term election over and Brent prices in the low $50’s, we think Saudi Arabia is pursuing a “Saudi First” policy to hike oil prices. The December OPEC decision to cut production is just the first step. Certainly, we expect Trump to continue to tweet criticisms at OPEC for any price spikes but we think the behind-the-scenes arm-twisting will cease at least until the President’s own re-election year in 2020.
Iran Waiver Extensions: April 2019 promises to be a big month for oil markets. Not only has OPEC scheduled an early special extraordinary meeting in April, but also the Trump Administration will make a decision about extensions of waivers from Iran sanctions. We think it is too early to tell what direction the administration might take but even if extensions are granted, they will likely require even lower amounts of Iran imports than allowed today. While we strongly disagree about the impact on fundamentals, the market has already shown a proclivity to view waivers as a significant catalyst for oil prices.
Venezuela: We are also keeping a close eye on Venezuela. The recent Venezuelan navy encounters with ExxonMobil’s oil rig vessels in the waters off the coast of Guyana have the potential to spark a major disruption to oil markets. If these incidents continue or goes too far, it could easily provoke Trump to take military action. As we have previously reported in client notes, Trump has openly talked about taking military action in Venezuela comparing it to President George H.W. Bush military intervention in Panama with former President Manuel Noriega. He has commented in a White House press conference that military action is an option in dealing with Venezuela’s President Nicholas Maduro. In the past, Trump has been talked back from a military option in Venezuela by Generals Mattis, McMaster and Kelly - but all of them will be gone in 2019. Moreover, there are more Venezuela hawks in the administration under Pompeo and Bolton. Aside from the Guyana incidents, the situation in Venezuela continues to get worse for its citizens and neighboring countries.