When the Organization for Petroleum Exporting Countries (Opec) meets on 30 November in Vienna, expectations are that the cartel will finally, finally come to some sort of agreement on a production cut. Whether they cut or not, one thing is certain. The main topic of conversation will be Donald Trump.
The meeting will mark the second-year anniversary of Opec’s decision to forego setting crude-oil prices and let the market set values, all in a bid to crush non-Opec output, specifically by US shale-oil producers, which was contributing to elevated global supply.
Opec succeeded in drastically curbing US production as oil prices plummeted to under $30 by February 2016, but they severely wounded themselves in the process. Member states such as Venezuela are in economic ruin, and Saudi Arabia itself has come to the international bond market for funds.
Now that Trump is president-elect after campaigning to free the US oil industry of the burdensome regulations he believes have held back US oil production, Opec must grapple with the possibility of increased production and another price fall.
“The Saudis have come to a realization of: ‘Let’s declare victory and find a way out of this because it’s not working,’” said Scott Roberts, head of the high-yield team for Invesco Fixed Income, and an expert on oil markets.
Hopes for cohesion in Opec sent crude oil prices higher this week, with the global benchmark Brent crude oil settling the week at $47 a barrel and the US West Texas Intermediate price closing at $45.9.
Opec is pumping at record levels, so if it agrees to cut production, expect oil prices to rally on the headline news, said Rob Thummel, portfolio manager at Tortoise Capital, which focuses on energy markets.
“I think Saudi Arabia has lost patience for these low oil prices … $50 to $60 is a sweet spot for them,” he said.
Whether prices stay elevated depends on the details of a production curb, Roberts and Thummel add.
News reports suggest Saudi Arabia may have the support from key members such as Iraq and Iran, and even support of non-Opec member Russia to cap production. Trump’s support for US oil production will hang over talks.
“I think they [Opec] are terribly concerned about it,” Roberts said. “The biggest concern the Saudis have is: what if the US encourages these companies to drill too soon and that puts another 500,000 barrels on the [already oversupplied] market, say 12 months from now? That could really weigh on prices.”
Michael Cohen, analyst at Barclays, agreed that Trump’s election put Opec in a tough spot. It may make it harder for the cartel to come to an agreement because of Trump’s campaign rhetoric on scuttling the Iran nuclear deal and pledges for US energy independence.
“One must question how willing Iran will be now to participate in limitations on its output given that its path to economic success just became more challenging. If Iran is not going to be willing to negotiate, neither will the Saudis,” Cohen said in a research note. “The Saudis too were not pleased with Trump’s rhetoric during the campaign. Even if his campaign promises will not be carried out, Trump’s pledge to wean the US off Gulf oil is not a message that the royal family wants to hear at this stage. If the Saudis feel that market management of any kind gives US producers an edge in cutting into their US market share, they would likely not intervene in the market.”
Thummel and Roberts said there were a lot of unknowns about Trump’s domestic energy policy aside from generalized comments about opening federal lands for drilling and rescinding the Clean Power Plan to help coal producers.
But price, not policy, will likely drive shale-oil production decisions, they said. Just because Trump opens more federal lands for drilling doesn’t mean companies will automatically throw up new rigs.
“The economics never lie. The economics still say the line of demarcation in the US is $50 [a barrel]. Below there we will not see much production growth,” Thummel said.
Michael Hsueh, analyst at Deutsche Bank, concurred: the concerns about Trump’s influence on US and global energy might be overstated. He noted changes from current US energy policy might not be great considering other “broader and more durable trends in place”.
Hsueh said net crude oil imports had been falling for the past 10 years and plans for offshore oil and gas leases for the 2017-2022 time frame were already being developed. Opening lands currently sheltered from drilling, such as Alaska’s Arctic national wildlife refuge or on the Atlantic coast, would have a stronger impact, but that is a longer-term consequence.
Even the Iran nuclear deal may not be in jeopardy, Hsueh said.
“President-elect Trump’s well-known disapproval of the … agreement on Iran’s nuclear program could well have the greatest impact, as a reimposition of sanctions would reverse Iran’s export gains and assist Opec in achieving its new output target. But even here cooler heads may yet prevail given the low likelihood of an improved alternative deal,” he said in a research note.
