Who's to Blame for Costly Oil: Saudis, Russia and Trump Himself
(Bloomberg) -- Rising oil prices are now the latest target in President Donald Trump’s cross-hairs. The nation’s tweeter-in-chief complained Friday about OPEC fueling an “artificially Very High" cost for crude that he said “will not be accepted!"
So what’s behind the jump in prices? Market outcomes, like success, can claim a thousand fathers, but here’s a potential rogue’s gallery for Trump following Brent crude’s move to almost $75 a barrel on Thursday, its highest level in more than three years:
- The Saudis - Trump’s right on this one. The world’s biggest oil exporter has signaled it wants to push prices even higher, to around $80 a barrel, as it seeks to fund the expansive (and expensive) economic agenda of Crown Prince Mohammed Bin Salman and support the valuation of state energy giant Aramco before an initial public offering. The kingdom spearheaded the successful effort by OPEC, Russia and other major producers to curtail global supply and boost prices. In a meeting this week, oil ministers signaled a willingness to see prices rise further.
- Russia - Saudi Arabia’s most important ally in cutting output has backed extending the effort through the end of this year. Meanwhile, tensions are rising between the West and the world’s largest crude producer. The U.S. and Europe announced tough sanctions on Russia in recent weeks, including limits hitting oligarchs in the energy sector, although Trump did reverse a plan earlier this week to impose more restrictions.
- The Iran Deal - Fears that Trump will reimpose sanctions on Iran when the nuclear deal is reviewed, largely arising from the president’s public comments, are adding to uncertainty in the market. The Obama administration’s agreement with Iran has boosted production from the nation by more than 1 million barrels a day. A Bloomberg survey of oil-market analysts found a 50-50 chance of a sanctions “snap-back,” which could halt as much as 800,000 barrels a day of exports from OPEC’s third-largest producer within six months. Watch prices rise then.
- Venezuela’s Meltdown - This OPEC member has seen its output decline amid political and economic strife. Trump has added to the pressure, with a drive to impose tough sanctions to punish President Nicolas Maduro. Among those hit by sanctions are the former chief financial officer for the state-owned oil producer, Petroleos de Venezuela SA. A cryptocurrency introduced by Maduro, based on the nation’s massive oil reserves, may also face sanctions, the U.S. has warned.
- Trade Wars - Trump’s tough trade talk, and tit-for-tat tariffs between the U.S. and China, have roiled global markets and raised the specter of further restrictions, at a time when American oil and gas exports are rising. In March, the industry said a new White House levy on steel imports could increase the cost of steel for wells by 25 percent and discourage pipeline construction as well.
- And about those pipelines: The Permian Basin, the heart of the shale boom, is running into shortages with labor, equipment and, perhaps most critically, pipeline capacity. The output above pipeline space could grow to almost 1 million barrels a day in the year ahead, with no significant new pipes coming online until the second half of 2019.
- Pipes aren’t the only things carrying oil. The Jones Act - Section 27 of a law enacted in 1920 requires that goods transported by ship between U.S. ports be carried on vessels built and flagged in the U.S. and owned and manned by U.S. citizens. That drives up the cost of shipping U.S. crude from the Gulf Coast, for example, to refineries on the East Coast, which often use international oil instead. Arizona Republican Senator John McCain, among others, has called for the act to be annulled.
- Finally, the world’s consumers can blame themselves. Global oil demand likely climbed by 2.6 million barrels a day in this year’s first quarter, the biggest year-over-year jump since 2010, Goldman Sachs Group Inc. said on Thursday. Rising consumer spending as well as cold weather in Europe and the U.S. helped boost demand, keeping Brent on track to reach $80 in the coming months, the Goldman analysts said.
- Meanwhile, there’s one lever Trump could pull to tamp down oil prices: releasing crude from the U.S. Strategic Petroleum Reserve. The emergency supply currently holds about 665 million barrels, according to the Energy Department. The backup has been tapped in the past to deal with market disruptions such as Libya’s civil war and Hurricane Katrina.
©2018 Bloomberg L.P.