Under Pressure From Trump, Saudis Put Brakes on Oil's Rally

Under Pressure From Trump, Saudis Put Brakes on Oil's Rally
The world's largest oil exporter just made quite a policy swerve.

(Bloomberg) -- The world’s largest oil exporter just made quite a policy swerve. Within six weeks, Saudi Arabia has gone from advocating higher prices to trying to stop the rally at $80 a barrel.

The U-turn scrambled the outlook for oil markets, hit the share prices of oil majors and shale producers and set up a diplomatic wrangle with other members of the Organization of Petroleum Exporting Countries.

What changed? The supply threats posed by the re-imposition of U.S. sanctions on Iran oil exports earlier this month and the quickening collapse of Venezuela’s energy industry are both part of the answer, but they’re secondary to Donald Trump. On April 20, the president took to Twitter to lambaste the cartel’s push for higher prices. "Looks like OPEC is at it again," he tweeted. "Oil prices are artificially Very High!"

Trump’s intervention gave typically strident voice to a concern held more widely in the U.S. and other consuming countries: oil’s rally from less than $30 in early 2016 to more than $80 this month risked becoming a threat to global economic growth.

On Friday, Saudi Oil Minister Khalid Al-Falih responded, saying his country shared the "anxiety" of his customers. He then announced a shift in policy that all but gave a green light for a market sell-off, saying OPEC and its allies were "likely" to boost output in the second half of the year.

"The tweet moved the Saudis," said Bob McNally, founder of consultant Rapidan Energy Group LLC in Washington and a former White House oil official. "The message was delivered loud and clear to Saudi Arabia."

After Al-Falih’s comments, made following a meeting with his Russian counterpart in St. Petersburg, saw crude drop more than $3 to below $67 a barrel in New York on Friday. The bullish tone of recent market chatter, increasingly punctuated with talk about oil prices climbing past $100, $150 and even $300, suddenly looks overdone.

It wasn’t just the U.S. Other major buyers of Saudi crude also put pressure on Riyadh to change course, albeit a little more diplomatically than Trump. Dharmendra Pradhan, the Indian petroleum minister, said he rang Al-Falih and "expressed my concern about rising prices of crude oil.”

OPEC officials were in a meeting at the opulent Ritz-Carlton hotel in Jeddah on Saudi Arabia’s Red Sea coast when Trump tweeted his views and they immediately saw it as a significant intervention.

"We were in the meeting in Jeddah, when we read the tweet," OPEC Secretary General Mohammad Barkindo said on Friday. "I think I was prodded by his excellency Khalid Al-Falih that probably there was a need for us to respond," he said. "We in OPEC always pride ourselves as friends of the United States."

Diplomats and oil officials in OPEC countries were also worried about the potential revival in Washington of the so-called "No Oil Producing and Exporting Cartels Act," which proposes making OPEC subject to the Sherman anti-trust law, used more than a century ago to break up the oil empire of John Rockefeller.

The bill first gained prominence in 2007 when George W. Bush was president and oil prices were flirting with $100 a barrel and made a comeback several years later under Barack Obama. While it was opposed by those presidents, the risk for OPEC was that Trump "could break with his predecessors and support its passage," said McNally.

In a sign that oil prices were climbing Washington’s agenda as gasoline prices approached the $3 a gallon mark, last week a sub-committee in the U.S. House of Representatives held a rare hearing on the NOPEC act.

There are also indications that Russia, whose decision to participate in OPEC’s cuts helped turnaround the oil market, has decided the rally has run far enough.


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