White House, Saudi Arabia Pour Cold Water On Trump's "Saudi Deal"

On Saturday morning, president Trump triumphantly tweeted that following a phone call with the Saudi King, OPEC's largest producer had conceded and in defiance of the OPEC agreement reached just last week, had agreed to pump as much as 2 million barrels of oil extra in an attempt to lower prices:

“Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference ... Prices to high! He has agreed!”

However, subsequent remarks by both the White House and Saudi Arabia via Reuters curbed Trump's enthusiasm. In a statement issued by the White House late on Saturday, it said that the White House said that the Saudi king had promised President Donald Trump that he can raise oil production if needed and the country has 2 million barrels per day of spare capacity.

"King Salman affirmed that the Kingdom maintains a two million barrel per day spare capacity, which it will prudently use if and when necessary to ensure market balance."

No guarantees, no promises, just a vague reference to what many believe is peak, or even beyond, Saudi oil production.

As a reminder, Trump's comments came just one week after Saudi Arabia along with the rest of OPEC nations including Russia had agreed on June 22 to boost production by a combined 700,000 to 1 million barrels a day, so any 2 million bpd-increase would be at least double market expectations, prompting a furious backlash from the likes of Iran. According to a Bloomberg report last week, Saudi Arabia would shoulder the bulk of this excess production, boosting output by a little under 1mmb/d to a record high 10.8mmb/d from the current 10mmb/d pace.

Separately, a source familiar with Saudi Arabia’s production plans told Reuters earlier in the week of the kingdom’s intention to increase output by 200,000 bpd this month.

Both a far cry from the 12 million barrels in Saudi production envisioned by Trump's tweet, which is urgently need to keep oil prices from surging at a time when the Trump administration is cracking down on Iran oil exports and demanding US allies cut their Iranian oil purchases to zero by November 4.

Meanwhile, Reuters reports that Saudi state media also downplayed Trump's rhetoric, and reported that "during the call the Saudi king and Trump emphasized the need to preserve oil market stability and efforts of oil-producing countries to compensate for any potential shortage."More importantly, the Saudi statement did not mention any intention by Saudi Arabia to raise production by 2 million bpd.

To be sure, there is speculation whether Saudi Arabia can even produce as much daily output as Trump suggested: while the kingdom has a maximum sustainable capacity of 12 million bpd, it has never tested that level of production.

We will be in uncharted territory. While Saudi Arabia has the capacity in theory, it takes time and money to bring these barrels online, up to one year,” said Amrita Sen of consultancy Energy Aspects.

Furthermore, if Saudi Arabia complies with Trump's demand it would not only provoke a harsh rebuke from the rest of OPEC which unlike Trump, is naturally far more interested in higher rather than oil prices, but could threaten the collapse of OPEC as nations defy the "agreement" reached between the US and Saudi Arabia.

As we reported yesterday, Iran’s Supreme Leader Ayatollah Ali Khamenei was furious, not only at Trump's behind the scenes negotiations but also of trying to turn Iranians against their government.

“They bring to bear economic pressure to separate the nation from the system ... but six U.S. presidents before him tried this and had to give up,” Khamenei was quoted as saying on Saturday by his website Khamenei.ir, referring to Trump.

Separately, Iran’s OPEC governor, Hossein Kazempour Ardebili, accused the United States and Saudi Arabia of trying to push up oil prices and said both countries are acting against the foundation of OPEC.

“If this happens, (it) means Trump is asking Saudi Arabia to walk (away) from OPEC,” he told Reuters.

“The market will go up to $100 I am sure as Saudi Arabia said they will plan an increase for July. ... This was managed between the two to rob the pocket of rest of the world,” he said.

Iran's anger is understandable: not only is the nation about to lose substantial market share to Saudi Arabia, but should Trump pull off another deal, the price of oil would drop, further deteriorating the already moribund economic situation in Iran whose currency has lost up to 40% of its value in just the past month, when Trump pulled out of the nuclear deal.

Iran's collapsing economy is already leading to sporadic anti-government protests according to media reports. And should Trump succeed in convincing Saudi Arabia to boost oil production to 12mmb/d, the fallout for Iran would be even more dire. Which, of course, is precisely the goal of Trump and while Saudi Arabia is hardly a friend of Iran, it will likely be concerned that by acting to punish Iran it could threaten the future existing of the oil cartel. Some energy reporters have already jokingly said that they are expecting an emergency OPEC meeting before September.

There is a potential drawback to Trump's strategy: should OPEC splinter (and even if it doesn't) it put much more strategic leverage in the hands of Vladimir Putin, who with Saudi Arabia pumping at capacity will suddenly become a marginal price setter for the world, especially with shale infrastructure sorely lacking amid a shortage of pipelines  to bring Permian oil to the market for the foreseeable future, and forcing deep discounts for Permian output.

Therefore, the big strategic problem emerging for Trump is that between Saudi Arabia and Russia pumping at near capacity, it puts the US at the mercy not only of Riyadh but also of, drumroll, Moscow which - in light of the imminent release of the Mueller report - is the last place the president would like to find himself. After all, should Russia decide to slash production indefinitely by one, two million barrels or more, it would bring stark memories of the 1973 oil embargo, and send the price of gas in the US soaring, potentially crushing Republican chances ahead of the midterms.

Meanwhile, as we noted yesterday, the bigger irony behind all this is that it is Trump's own crackdown against Iran, and his renewed sanctions against Tehran's oil production that is the main culprit for the recent spike in oil and gas prices (an outcome we previewed back in late 2016 in "Will Trump Send The Price Of Oil Soaring?").

And it is the realization that surging gas prices threaten to undo the positive impact of Trump's fiscal stimulus and tax cuts and cripple the US economy as consumers are forced to spend more money on gas and less on discretionary purchases, as explained previously, that has spooked the president forcing him to demand increasingly more "favors" from Saudi Arabia.

As a result, Brent topped $80 a barrel on May 17, the highest level since November 2014, while WTI has climbed even faster in recent days. It closed Friday at $79.44: $80 Brent has also emerged as a "red line" for Trump, around which the president starts lashing out at OPEC and Saudi Arabia on twitter and elsewhere.

Finally, if oil prices were to drop as Trump desires, it would also drag energy stocks lower - which have emerged as one of the very few resilient sectors propping up the market - and slam the market, at which point Trump may start demanding Saudi Arabia cut production once again....