OPEC Can Handle Trump's Tweets If Venezuela Gets Worse
(Bloomberg Gadfly) -- See, OPEC? See what you did?
What explains President Donald Trump's Friday-morning focus on restrictive commodity agreements? Your guess is as good as mine.
Mine, for what it's worth, would have something to do with the fact that gasoline is already north of $3 a gallon in Washington, D.C., and the sun only just came out on the East Coast after a winter worthy of Game of Thrones. The prospect of an even more expensive summer driving season, leading into mid-term elections Republicans dread already, merits one or two angry tweets at least.
And while there are, of course, hundreds of thousands of Americans employed in producing oil and gas, their ranks pale somewhat against more than 212 million licensed drivers, most of whom can also vote.
In any case, the president is right in one respect: Oil prices are artificially high. That's what restrictive commodity agreements are for. Indeed, one almost has to admire the chutzpah of OPEC ministers pushing back on the president's assertion on Friday ... on the sidelines of a meeting where they decided to continue holding barrels off the market to support prices.
OPEC, and in particular its de facto leader Saudi Arabia, is playing a risky game here by pushing for even higher oil prices (see this). And that's partly because the Middle East no longer holds all of the wild cards in the global oil game. Washington's unpredictability is a bigger factor than it used to be.
The president isn't likely to tweet about this, of course, but uncertainty about what will happen with the Iran nuclear agreement, for example, is one factor pushing up prices. Another is Venezuela.
It is shocking how much of OPEC's success in clearing the glut of oil inventories is owed to the misery of one of its founding members. In March, compliance among the original 11 members who signed up for cuts in November 2016 was very high, at 170 percent. Within that, though, Venezuela's was more than 600 percent.
The real story lies in the cumulative numbers.
In theory, these 11 countries should have collectively withheld about 530 million barrels from the market from January 2017 through the end of last month, of which Venezuela should have accounted for about 8 percent. According to OPEC's figures, however, they actually withheld 599 million barrels; and Venezuela was responsible for more than 17 percent of that bigger amount.
The past six months or so clearly marked a tipping point, coinciding with the rally in oil prices.
In absolute terms, Saudi Arabia has cut more barrels than any other member versus its baseline output -- as you would expect of the largest producer by far. What is really striking, however, is the comparison of absolute outperformance; that is, how many extra barrels OPEC members have withheld over and above their targets. On that measure, Venezuela has actually moved into the, er, number one slot:
Despite Venezuela's production having dropped by almost 550,000 barrels a day since the end of 2016, it could easily keep going down.
And one big catalyst for that could be, you guessed it, tougher sanctions from Washington. These look likely given the extreme unlikelihood of fair elections in Venezuela next month. It's not clear what form sanctions might take. But the elevation of hawks such as John Bolton and Mike Pompeo in the Trump administration suggests harsher options, such as banning U.S. imports of Venezuelan crude oil altogether, could be on the table.
As ClearView Energy Partners rightly pointed out in a recent report, such a ban might simply shift those barrels elsewhere rather than take them off the market completely -- albeit likely at a discount. Still, further revenue reductions would exacerbate Venezuela's economic pain, serving to undermine the prospects for oil production, too.
As for the president's tweet, there's no telling how that factors into what happens. It might betray discomfort with the idea of doing anything to push pump prices even higher over the summer. Equally, it could just be preemptive finger-pointing to direct drivers' anger elsewhere. And, equally, it may not add up to anything substantive at all.
What is clear is that supply squeezes, both planned and unplanned, are now an essential element of the oil rally. That's why OPEC can't bring itself to end its cuts, and also why it risks alienating consumers everywhere, not just on Pennsylvania Avenue.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
©2018 Bloomberg L.P.