Why OPEC Should Fear The Trump Administration

Tyler Durden's picture

Submitted by Emad Mostaque via GovernmentsAndMarkets.com,

Oil prices have risen over 20% since the OPEC production cut agreement at the end of November. While concerns abound on quota cheating and increased production from Libya, Nigeria and US shale, the incoming US administration could change the market completely through strategic oil sales and new import taxes.

The paralysis of OPEC between the summer of 2014 and November of 2016 was primarily due to the uncertainty in the equation introduced by US shale oil production.

Shale had much shorter production cycles than other forms of oil and had been financed by a huge debt and equity boom in the sector spurred by low interest rates, piling into exploration and production.

To the Saudis, who would have to lead any cut, this presented a conundrum as it was uncertain if shale producers would rapidly step in to fill any production cuts. This would have been a wealth transfer from Saudi to the shale producers, which was intolerable.

The equation has now changed for Saudi as they tap capital markets for sovereign debt and the upcoming Aramco IPO, meaning they would come out ahead regardless of shale and cheating.

The next few months are vital for the oil market as adherence to OPEC quotas and a potential supply resurgence from disruptions in Libya and Nigeria are monitored, particularly as Russian participation is conditional on no cheating.

However, an unexpected shift in the balance of the oil market in the next few months could be the actions of the incoming US administration under President Trump.

While the President-elect has shown flexibility on many of his pledges, the one area he has shown consistency and made appointments in line with his stated stance is on trade, moving the US in an mercantilist direction.

If trillions of dollars leaving US shores for cheap goods from China is intolerable, the idea of being dependent on OPEC oil, produced at a significant discount, is even worse.

An “America First” stance and renewed focus on North American energy independence could lead to two significant changes: a resizing of the Strategic Petroleum Reserve (SPR) and introduction of a border adjustment tax.

The SPR was established in 1975 after the 1973–74 oil embargo to mitigate against future temporary supply disruptions. The SPR holds 695 million barrels of oil, with a maximum withdrawal rate of 4.4 million barrels per day.

As a member of the International Energy Agency, the US must stock an amount of petroleum equivalent to 90 days of imports. Due to the surge in local production, net oil imports are now oil 4.8 million barrels a day versus a peak of 13.3 million barrels per day in 2005. As such, the SPR now holds 265 million excess barrels of excess oil.

A mercantilist administration could legitimately authorize a release of a million barrels a day to rebalance the SPR.

A drawdown of 190 million barrels has already been announced by the Department of Energy over the next 8 years, but there is no reason this could not be accelerated.

This would completely undo the OPEC deal, based on cuts of 1.2 million barrels a day and likely lead to a rush for market share. This would also drop gasoline prices, helping the US consumer.

While this would pressure US shale producers, many of these companies have taken the opportunity of the recent oil rally to hedge future production. The proceeds from the SPR release, likely over $10 billion, could be used to kick start energy infrastructure investment designed to further increase US energy independence, such as outlined in the “Pickens Plan” from 2008.

This fits with Trump’s plans for a trillion dollars of infrastructure spending, but another of his proposed policies, a border adjustment tax, part of the “Better Way” reform package, could cushion the blow of an SPR release for shale producers.

Under this policy, imports would be taxed at the new corporate income tax rate of 20% and income earned from exports would be tax exempt. While the impacts of this proposal are far-reaching, it gives domestic US oil producers an immediate 25% price advantage over imported oil and would most likely cause the dollar to spike by double digits.

This could cause gasoline prices to increase by as much as 30 cents to a gallon per a recent paper by Philip Verleger and the Brattle Group, but an SPR release would offset this.

Imports from the Gulf would collapse to almost zero in this scenario, with a resurgence of US energy investment potentially leading to a supply surge to fill this gap in future. SPR sale revenue could also discount gasoline taxes in the adjustment period.

While the oil market is anticipating an orderly tightening of supply conditions, these actions would change the game, placing the balance of power firmly with the USA absent a significant change in strategy by OPEC and other major producers.

As such it may now prove wise to be wary on the potential for oil prices in the near term, with demand dependent on whether Trump follows through on his planned mercantalist stance on trade.

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Carl Spackler's picture

Rex Tillerson knows a thing or two about this topic and should be in a prime position to advise the President.

cheka's picture

peak oil...lmao

it's so scarce that the market can't function without a cartel and govs limiting production

The Saint's picture
The Saint (not verified) cheka Jan 11, 2017 6:18 PM

I think Trump will be opening public lands to drilling and fracking and open Alaska and off-shore too.  OPEC will be crying for mercy.


Post-Truth Society's picture

OPEC has little to fear from Trump.  After all, Trump is a Muslim.  Several times he has publicly praised the merits of Sharia law, including the ease with which a man can get a divorce.


wren's picture

Post-Truth Society:

I'd respond, but you can't fix stupid...

Post-Truth Society's picture

Perhaps you don't understand the definition of the word "respond".


poeg's picture

Trump's a Muslim like Obama is good at improv.

fauxhammer's picture

I'm sure the Clinton Foundation can be brought in to patch things up with the Saudis.  Maybe over pizza.

Post-Truth Society's picture

Trump also loves pizza, and the Saudis, his Muslim brothers.

DownWithYogaPants's picture

WTF is wrong with you?  You're not funny and you're not making any point(s).

Trump is no fan of muslims. Period. We all know that.

Post-Truth Society's picture

Trump is actually a Muslim.  Maybe some of his rhetoric is designed to hide that fact.  More on that another time.

But for now you should consider his affinity for pizza, of the Pizzagate variety.  Take a look at the design of the top of Trump Tower (NY) on a map.  It matches the triangular pedophile symbol for "boy lover".


Post-Truth Society's picture

While you are looking at Trump Tower, check out the two notches, viewed from above, on the eastern side of the building.  These face perfectly toward the Kaaba in Mecca (approximately 60 degrees east of due north.)  Trump likely has a prayer room on one of the upper floors.

I know this is hard to accept.  But there is actually a mountain of evidence that Trump is a Muslim.

poeg's picture

Loves feeding Muslim brotherhood members Hawaiian pizza for shits and giggles... shits and giggles.

Croesus's picture

The whole system should fear Trump, along with the millions who voted for him.


shovelhead's picture

Urination fetish.


DownWithYogaPants's picture

God that was an epic troll.  Who took a hit up the ass?

-1- John McCain

-2- CIA

-3- main stream media.

They all look like idiots. ( They always have to me).  It's now obvious to anyone with a shred of reason in their head.

Salsa Verde's picture

Drill baby drill!  Bankrupt Saudi Arabia and their sick twisted religion.

HRH Feant's picture
HRH Feant (not verified) Jan 11, 2017 6:17 PM

Alaska has lots and lots of untapped oil! Drill baby drill!

wren's picture

A recent find in Alaska...


The issue in Alaska is the fact that the feds own over 61% of the state. Other lands are set aside by Congress to settle things like the Native Claims Settlement Act, and they remain closed by Congress even though these settlements were already completed decades ago. Not to mention agencies like the EPA regulating what can be done on these lands.

Alaska has oil, gold, platmates, copper, iron, titanium, you name it Alaska has it in HEAVY supply, not to mention fisheries and timber. Kick the feds out and you'll see what can be provided by this great state. Also, Alaska has a great state government which would protect the environment, but the east coast environmentalists sitting in Congress believes they know best...

I hope Trump reaches out to Alaska...

McDuff71's picture

...get the states "off the meddle east oil teat" asap...plenty of reserves at home:smash'em and bash'em...

DC Beastie Boy's picture

Because the US is the biggest oil export country in the world. Along with exporting war, inflation and kicking ass!


Escrava Isaura's picture

You really should refrain from commenting and go do some research.

Now we can’t make this stuff up.

First we had (have) fake news.

And now we have fake (misleading) chart.

Below is the crude oil import, it’s by the same people that issued the chart. Accordingly to the link below the US is currently importing 7.6 million barrels of crude oil a day, which makes this article strategies worthless.



sinbad2's picture

The US imports oil because US production costs are high. Once the US dollar collapses, the US will become the next Saudia Arabia, without the girly white robes.

Escrava Isaura's picture

Only in folk science that you can believe the US will, or can be self-sufficient on oil, because it’s an impossible task.

The two main reasons that the US economy hasn’t collapse yet has to do with:

1) the world oil is priced in dollars, thus giving us oil at whatever price our financial institutions manipulate its price. Believing that Saudi, or for that matter that any other Gulf State or other oil producer can set the oil price just show how naive and ignorant that person is.

2) If wasn’t for crude oil imports, US shale, US corn ethanol, US coal, US green energy wouldn’t survive five hours. All these grids/infrastructures will stop working once there’s no more oil (2027/2032).



DC Beastie Boy's picture

The US has all the coal and gas it needs for the next 1000 years.

We will default on the foreign debt and become energy self sufficient. 

This is grade school energy economics.

DC Beastie Boy's picture

Really I meant the USA is the #1 energy exporting country in the world.  For petro the USA is #3 behind Russia and the soon to be bankrupt Saudis.

You Only Live Twice's picture

The US can never take any action that would hinder OPEC as that would be endangering the Petrodollar and the stability of the US dollar. Nothing will be done to ever damage relations with OPEC. That is why Russia is so feared - they sold Oil and Gaz to China in Yuans and Rubles. Same with Iran.

McDuff71's picture

...i suppose the question is does the petrodollar make sense anymore anyway? - have the Saudis got more to lose on an abandonment and who would they go for instead?? ...chinas trying to steer their ship towards a gold backed yuan but in global terms it's a central govt basket case - the ruskies with their roobles ;))!!....OPEC is no longer really a cartel - there are too many players all looking to supprot their own interests - with that massive shale find in texas (http://www.ecowatch.com/wolfcamp-fracking-texas-2097027512.html) the olny thing OPEC has to worry about is US self sufficiency - their economy - beneath the sand -  is USD backed - they can't afford to bail, they'd be wiped out overnight!!...we await ;))

You Only Live Twice's picture

Those are good points! Does the Petrodollar make sense?... It is the only thing keeping the dollar afloat. It is not a question of making sense, but the very survival of the currency depends on it. It even remains to be seen how much damage this prolonged period of low oil prices will do the the dollar and USTs with 20 trillion in debt. If OPEC kicks the Petrodollar, then the debt returns home and the Fed has to monetize it which means hyperinflation. If several countries (let's say China, Russia, India and Iran) moved to the Gold Standard, then OPEC would be stuck. China is the biggest client and Iran and Russia are major providers. The US has simply too large a currency and debt base to have any kind gold standard. You are right - we will have to wait and see...

Herodotus's picture

The bigger they are, the harder they fall.

You Only Live Twice's picture

Seems the old saying has never lost it truth! I guess one could say in the same context, the bigger the debt, the bigger the collapse?

McDuff71's picture

...strange days YOLT...you know I'd bet "all the gold in China" that gold backing - if asked to be proven/redeemed - wouldn't be possible which is what happended when the US moved off the gold standard to stop the outflow and uncover the dirty truth...currency only works if we trust it - I don't trust anything that can be printed or leveraged against something purported to exist...can you imagine any one of these nations currencies being a reserve with systems as opaque as they are?...or god forbid the IMF?!?!?...the fact is that mums and dads - the public - holds the most debt in all of this and -as always -  will be the ultimate losers should we see a collapse...that QE was shuffled in my/your hands whether we wanted it or not...

You Only Live Twice's picture

Again, those are all good points! The thing is that if you move to a gold standard, then your can't print over and over. It puts a halt to inflation/expansion of the money supply.

The QE thing is the most dire legacy of Obama that will be the undoing of the US dollar at some point. You need super high Oil prices to maintain a Petrodollar System that supports demand for that large a debt. Of course, all citizens will pay the price for this. You are right - no common person was given a choice in this.

jtlien's picture

There are a ton of drillers that would like to jump across border from Pennylvania to New York.

If only the Peoples Republic of New York would allow fracking.

I'm sure Trump could put some pressure on his home state.

Ecclesia Militans's picture

The entire western half of Libya has been barely surveyed and initial studies indicate that there is a great deal of untaped light sweet crude ready to make the short trip to Europe.  I think Sydney Blumenthal is still trying to run something out of the Corinthia Hotel via frequent skype calls in Tripoli to stay part of any deal that developes over there.  I wonder if anyone is answering the phone when he calls....

detached.amusement's picture

“Unacknowledged : An Expose of the Greatest Secret in Human History”.

Sirius reached number 1 on Netflix for documentaries and was acclaimed throughout the world.

“Unacknowledged” will focus on the historic files of the Disclosure Project and how UFO secrecy has been ruthlessly enforced – and why.

The best evidence for Extraterrestrial contact, dating back decades, will be presented with direct topsecret witness testimony, documents and UFO footage.  The behind-the-scenes research and high level meetings convened by Dr. Steven Greer will expose the degree of illegal, covert operations at the core of UFO secrecy. From briefings with Laurance Rockefeller and for the Clintons, to meetings with the CIA Director, top Pentagon Generals and Admirals, to the briefing of President Obama via senior advisor John Podesta, current chairman of the Hillary Clinton Campaign – we will take the viewer behind the veil of secrecy and into the corridors of real power where the UFO secrets reside.

The viewer will learn that a silent coup d’etat has occurred dating back to the 1950s and that the Congress, the President and other world leaders have been side-lined by criminal elements within the Military-Industrial-Financial complex.

Super-secret Unacknowledged Special Access Projects (USAPs) dealing with ET technology, zero point free energy, antigravity research and the real agenda behind Star Wars (SDI) will be exposed as only we can.




Whatcha say, DT, hows about we crack the lid on this and see what's inside? 

RealistDuJour's picture

And the pink elephant is Trump undoing the Iran "deal".

RopeADope's picture

If Trump is too stupid to realize he killed Israelis for Bibi he will. (I am talking about the truck attack)

When Trump mouthed off about moving the embassy to Jerusalem he was just playing into the Likud brain trust's decades long strategy of indirectly making dead Jews to gain political power for Bibi.

It depends on where the embassy bloviating came from. If it originated with Jared Kushner then America is probably fucked. But if came from a Adelson/Mercer parasite there is a chance of the senile dodo bird activity stopping.

billwilson2's picture

More like why ALL of us should fear a tRump administration. A lunatic is about to get the nuclear codes. 

FrankDrakman's picture

Only a retarded fool like you would believe Trump is a warmonger.

We know Obama is. There hasn't been a day in his presidency when the US hasn't been at war, a first.

We know Hillary ("We came, we saw, he died") is a warmonger.

We know anti-Trumpers like McStain and Limpdick Graham are warmongers. 

Trump is the only guy who actually WANTS peace, probably cause his money is tied in peaceful things like hotels and golf courses, while all the rest of them are heavily invested in General Dynamics, et al. 

Cassandra.Hermes's picture

We don't need to import oil at all, if renewables grow with the current rate. Most people commute less than 30min and electric cars are getting cheaper, batteries price keep dropping 5-10% per year and quality is getting better.

Herodotus's picture

Yes.  Electric cars fueled by clean coal is our future.

sinbad2's picture

Clean coal is an oxymoron.

barysenter's picture

Why the whores in DC beholden to semites with scimitars should be very, very afraid...

Yen Cross's picture

   This article is redundant.   Yes, shale exploration was driven by speculation and cheap financiang, but the oil industry knew the oil was there.

  They needed cheap proven extraction costs. Has everyone just forgot about the >  Mammoth oil discovery in Texas may be biggest ever - CNN.com

  USGS Announces Largest Oil And Gas Deposit Ever Assessed In U.S. : The Two-Way : NPR

McDuff71's picture

...who needs a cartel when you find this in your backyard!! ;))

Zen Xenu's picture

Worthless, uninformed article. ZH, I'm surprised at you. I'm very much pro Oil & Gas, but the bulk of tight oil (referred to as shale oil) is simply uneconomical under around $80 bbl. 

US tight oil production depends on low cost borrowing coupled with very high oil prices. The bulk of US tight oil is pretty much a ponzi scheme.

Not trolling. Bracing for the expected red downvote arrows, but I'm sticking to my guns here.

patriotinCalif's picture

This article does not mention a very important point. Trump is going to open federal lands to drilling. This means more US produced oil than just fracking. We will not buy any OPEC oil when that happens. No more reliance on the Arab oil.And that is good for national security.