OPEC Again Faces Choice Between Trump's Wrath and Oil Slump

(Bloomberg) -- It’s becoming a familiar choice for OPEC: risk the pain of an oil-price slump, or provoke the wrath of President Donald Trump.

After another warning on Twitter on Monday to avoid pushing crude higher, Saudi Arabia and its allies are again are faced with a dilemma: Maintain production cuts and defy a president who could enforce legislation that shakes the group to its foundations. Or do as he asks and risk a repeat of the price rout that battered their economies last year.

The Organization of Petroleum Exporting Countries had no official response to Trump’s statement, but three oil officials from the Persian Gulf said the group has learned from its 2018 mistake, when heeding Trump’s call to pump more crude created an oversupply.

“I think they will send this call straight to voicemail given the November experience, and the fact that this has all the hallmarks of a self-inflicted wound,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC in New York. “Trump has sanctioned two OPEC countries and is calling on OPEC now to dig him out of the hole he helped dig.”

The president has renewed his pressure on OPEC and its allies after they started a new round of output cuts last month. The group’s supply reduction, plus U.S. sanctions on Venezuela and Iran, has contributed to a crude-price rally of more than 20 percent this year.

Trump has been quick to show his displeasure at rising prices. Last summer, when he urged the Saudis to open the taps while he imposed sanctions on Iran, the kingdom bowed to his wishes, boosting production within a few months to record levels.

The organization displayed a different response to Trump’s subsequent request. On the eve of an OPEC meeting in December, Trump’s call to keep production high was disregarded by the group and its allies, who announced an output cutback of 1.2 million barrels a day that they’re now implementing.

Lessons Learned

Saudi Arabia may insist that, if the U.S. genuinely fears a supply shortage, it should tap its emergency supplies, according to Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug, Switzerland.

“Saudi Arabia is probably going to call Trump’s bluff and ask the U.S. to use its Strategic Petroleum Reserve instead,” said Jakob.

Nonetheless, the price response on Monday showed that traders are seriously considering the Saudis may at least soften their output cuts. Brent crude futures, the global benchmark, tumbled 3.5 percent to $64.76 a barrel in London.

“We might see a less aggressive stance on supply cuts from the Saudis -- this might stop them from cutting deeper,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich.

The risk to OPEC comes in the form of the so-called No Oil Producing and Exporting Cartels Act, or NOPEC, a bill resurrected by U.S. legislators that would make the group subject to the Sherman antitrust law, used more than a century ago to break up John Rockefeller’s Standard Oil Trust.

Congressional support for the bill intensified last year as oil prices neared a four-year high, and Trump publicly blasted OPEC. In the past, the White House has opposed the NOPEC legislation -- both George W. Bush and Barack Obama threatened to veto it. OPEC’s concern now is that Trump may break with his predecessors.

“Recent history has shown that Saudi Arabia and OPEC cannot disregard pressure from President Trump,” said Bob McNally, president of Rapidan Energy Advisors LLC and a former oil official at the White House under President George W. Bush. “As crude prices edge back up toward politically sensitive levels in Washington, OPEC+ members will consider tempering cuts.”

OPEC’s course of action will probably become clearer when key members of the group and its partners meet for a review of their accord in Baku, Azerbaijan, on March 18. The whole 24-nation coalition will gather in Vienna for a policy-setting meeting a month later.

Whatever they decide, there will be pitfalls, according to Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt.

“There are no good choices,” said Weinberg.

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