The US president has accused OPEC of being “at it again” for the second time in as many months
As OPEC oil ministers prepared to meet in Vienna later this week, President Trump fired another twitter-shot across their bows. But it is his decision to slap sanctions back on Iran that is the real driving force behind the rising price of oil, writes Bloomberg’s Julian Lee.
The US president has accused OPEC of being “at it again” for the second time in as many months through his favoured 280-character diplomatic channel. Quite what "it" is, he has never specified.
I am always a bit confused about what people actually mean when they accuse the group of artificially raising the price of oil. OPEC doesn't set it—and hasn't done so for more than 30 years.
Perhaps the president is railing at the fact that some members of the group have spent millions of dollars creating production capacity that they aren’t using. Seen in another light, that surplus is a vital safety valve in the event of a sudden loss of supply—such as the one that occurred when US-led forces invaded Iraq in 2003, or when Western-backed rebels overthrew Libya's Moammar Al Qaddafi in 2011. OPEC's spare capacity has been used to compensate for sudden supply disruptions more often than America's strategic petroleum reserve.
There is no reason that OPEC should pump as much oil as President Trump, or anyone else, wants. The organisation exists to look after the interests of its members. Some of them might see appeasing the United States as being in their best interests. Others clearly do not.
It was less than two years ago that candidate Trump's energy adviser Harold Hamm told Bloomberg Businessweek that OPEC was “irrelevant.” A little over a month later the same Harold Hamm said it was “high-time” for the irrelevant OPEC to agree on a production freeze to raise prices.
No-one expects politicians, or their advisors, to be consistent. And oil at $67 a barrel is very different to oil at $46. Back then, US shale oil production was on the slide and needed a saviour. It found one in Saudi Arabia's then Deputy Crown Prince Mohammed Bin Salman and oil minister Khalid Al-Falih, who reversed the kingdom's “pump-at-will” policy and began to set oil prices on the path to recovery.
Now Saudi Arabia is once again at the forefront of a group of OPEC countries urging other members to do as America wishes—this time by raising output. The about-face comes hard on the heels of Al-Falih's assertion just eight weeks ago that OPEC's market-balancing job wasn't yet done, and that output restraint needed to be prolonged.
What changed in those eight weeks? The outlook for the availability of Iranian oil. Trump's decision to pull out of the nuclear deal and re-impose sanctions will reduce the volume of crude available from the country by an unknown amount.
I have said from the outset that the amount of Iranian oil that will be forced off the market will be more than when sanctions were previously in force—even without the EU bans on purchases that accompanied US curbs last time around. Analysts are now starting to ratchet up their forecasts of the volume that could be lost.
The curbs will be more extensive than under President Obama—targeting Iran's exports of condensates as well as crude oil—and waivers will be harder to come by. Tanker owners and insurers may already be reacting to the imposition of sanctions, even before they come into effect.
It is the fear that the world is about to lose as much a million barrels a day of Iranian crude oil exports by the end of the year, and possibly another 500,000 barrels from Venezuela, that has really driven oil prices higher—not OPEC.