Update: we didn't have long to wait for the Saudi response, which came just 30 minutes after the Trump tweet:
- THERE'S NO SUCH THING AS ARTIFICIAL OIL PRICES: SAUDI MINISTER
Which is ironic coming from the head of an oil cartel whose only purpose is to keep prices artificially high. It is even more ironic because just two years ago OPEC itself was slamming "evil speculators", hedge funds and anyone else who it suspected of selling oil for creating an "artificial oil price."
Here are some other responses, first from OPEC Secretary General Mohammad Barkindo, who said the U.S. oil and gas industry benefits from OPEC’s efforts to restore stability in the market.
“We in OPEC pride ourselves as friends of the United States who have vested interest in their growth, development and prosperity." He also said that the OPEC, non-OPEC deal “has not only arrested the decline but rescued the oil industry from imminent collapse and is now on course to restore stability on a sustainable basis in the interest of producers, consumers and the global economy."
Elsewhere, Russian Energy Minister Alexander Novak told Bloomberg TV, Russia rejects Trump’s claim of artificially high oil prices, saying you can’t say that somebody is pushing oil prices up or down artificially when asked to respond to U.S. President Donald Trump’s tweet.
Claiming that "oil prices are determined by the market" which is amusing considering Russia is now affiliated with an oil price cartel who only purpose is to short circuit the ffect of the market, Novak said that the U.S. has been boosting its own oil output thanks to production cuts by OPEC, Russia and their allies.
"The deal helped to restore the industry of Texas" Novak said, which is another way of saying "prices at the pump are high."
Novak also said that OPEC and its allies aren’t planning to discuss Trump’s comment now, and added that there are no disagreements between Saudi Arabia and Russia on the future of the supply deal, as both countries have the same opinion on the market. i.e., the price could be even higher.
The Russian concluded that everybody is interested in continuing cooperation and the group is aiming to do that; he refused to comment on the possible impact of additional U.S. sanctions on Iran.
* * *
It was supposed to be OPEC's day, as a joint technical panel of OPEC and non-OPEC nations (also known as OPEC+) met in Jeddah, Saudi Arabia and declared that the global oil glut that has weighted on oil prices since the infamous OPEC Thanksgiving Massacre of 2014 and prompted the historic Vienna OPEC production cut agreement, has been effectively eliminated.
Little did OPEC+ know they were all about to be upstaged by yet another Trump tweet.
But first, back to Jeddah where OPEC and Russia congratulated themselves on "impressive results", having wiped out 97% of the targeted inventory surplus. But, as Bloomberg notes, instead of celebrating victory, the world’s largest producers are finding reasons to continue cutting output. And now, instead of targeting the excess inventory, OPEC+ has decided that production curbs should continue because another important goal - boosting investment in oil and gas production - remains far out of reach, according to Saudi Energy Minister Khalid Al-Falih.
The Saudi minister's most important ally, Russian counterpart Alexander Novak, agreed there’s no obligation to stop just because the pact’s initial goal - stockpiles back in line with the five-year average - is at hand.
“We have our targets, but there’s no strict formula under which we would decide: ‘Well, we’ve reached zero, so we are done’,” Novak told reporters in Saudi Arabia on Friday.
What he really meant is that: oil prices keep rising, this is great for Russia, it's great for the Saudi budget deficit and the upcoming Aramco IPO, it is great that it is mostly off the back of Venezuela whose oil production is collapsing on its own and without OPEC's help which means even more gains for us, and while shale will eventually flood the world with oil, we will cross that bridge when we come to it.
While soaring U.S. shale production remains a nagging concern, the key players appear to be more fixated on the immediate benefits of high crude prices:
Saudi Arabia needs to cover weighty domestic spending and attract investors to a partial sale of its state oil company, Aramco. Russia is relishing its new role as a major Middle East power broker, while also enjoying bigger financial gains than anyone from the accord.
To be sure, OPEC has ample reason for optimism. As Bloomberg notes, "crude has surged to a three-year high and the glut that triggered the deepest oil-industry downturn in a generation is all but gone. Yet OPEC’s choke-hold on its own production is only getting tighter. As oil ministers gathered in the Saudi city that neighbors Mecca for the meeting of the Joint Ministerial Monitoring Committee, the $80 a barrel the kingdom desires was inching closer."
Al-Falih chimed in, adding that "there’s nothing to fear from prices rising even further from their current three-year high."
And sure enough, OPEC has every intention of continuing to limit output (again, mostly thanks to the Venezuelan implosion) and ministers signaled the cuts would continue. Saudi Minister Al-Falih in particular gave a strong indication that he thought higher prices wouldn’t be a bad thing. Every year the world needs to develop new daily production capacity of about 4 million to 5 million barrels, but that’s not happening right now, he said.
“There is the capacity for higher prices” without hurting demand, Al-Falih said. “We have seen prices significantly higher in the past, twice as much as where we are today” and the global economy has the capacity to absorb them.
To summarize OPEC's stance: it managed to get oil from $30 to $70 targeting the inventory overhang, and now that that is gone, OPEC will gun for $100 as long as investing in future production does not return to historical levels (clearly unaware of such things as cost efficiency and progress).
It was all going great, with both WTI and Brent rising gingerly... when at exactly 7am ET Trump decided to diversify his asset-linked tweeting away from equities and the US dollar, and took on oil and OPEC head on with the following tweet:
Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!
Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!— Donald J. Trump (@realDonaldTrump) April 20, 2018
In instant kneejerk reaction, Brent tumbled by nearly $1, back under $74, and was now down on the day, unsure what to do now that the president has decided to branch out into yet another asset class.
We eagerly look forward to OPEC's reaction now that Trump has made it clear that $70 WTI is the US president's "red line" for gas - and oil - prices above which, as we discussed previously, Trump's own tax cuts will be wiped out as a result of the required spending on gasoline which will reduce all other GDP-boosting discretionary spending...