Why OPEC has Trump over a barrel on oil prices

I don’t know how we all missed it, but last month marked the ninth anniversary of Donald J. Trump joining Twitter. Given that @realDonaldTrump has become the de facto official voice of the president, you’d think the occasion would have received more attention. And the numbers are sort of impressive.

Since setting up his account in March 2009, Trump has posted (or had someone post) 37,400 tweets, which amounts to a simple average of 4,155 a year — upwards of 10 a day. By comparison, Barack Obama, who has been on Twitter two years longer than Trump, has posted only 15,500 times, or about 1,300 tweets a year. (The fact that Obama has roughly twice as many followers as the current president probably says something about optimal tweet rates, but I’m not sure what.)

Anyway, the point is that Trump tweets a lot. His posts are so plentiful that a casual observer might miss a few tasty ones, especially when he’s indulging in a tweet storm. For instance, he posted roughly 30 times between suppertime last Thursday and Sunday night, and among other targets blasted James Comey, The New York Times and reporter Maggie Haberman, Andrew McCabe and Nancy Pelosi. But he also turned his sights on the Organization of Petroleum Exporting Countries. “Looks like OPEC is at it again,” Trump thumbed in the wee hours of Friday morning. “Oil prices are artificially Very High! No good and will be not be accepted!”

It’s safe to say that the OPEC-directed tweet was not the most inflammatory, nor oddly capitalized, of Trump’s missives. Markets took some notice, however: benchmark crude prices wavered, with West Texas Intermediate dipping towards US$67 on Monday. But by the end of the day, it had regained all it had lost and then some, closing north of US$68.

In all, not much of a story, as the recent oil rally still looks intact. But Trump’s tweet remains illustrative by reflection — and shows just how resilient oil prices might be, and at least in part thanks to Trump himself.

That’s not just because the thinking behind the tweet seems odd. What could he possibly mean by saying OPEC is “at it again”? Perhaps he should look up “cartel” — keeping prices artificially high is pretty much what OPEC is all about. As well, the organization has been open about the production limits its members (along with non-OPEC member Russia) agreed back in 2016. And they’ve been in place for more than a year.

No doubt, those limits have helped the oil price recovery, which has seen WTI gain nearly US$25 a barrel since last June. But so have a firmer footing for global growth and expectations of rising demand. It’s not all OPEC, and it’s not all bad.

On the other hand, the rally has made U.S. gasoline prices soar, to above US$3 a gallon. Some commentators believe that may be the real target of Trump’s tweet; after all, summer driving season and fall elections are coming up. Yet that raises something of a logical problem. Even leaving aside the fact American consumers pay less for gasoline than those in any other developed country (25 cents US  less than Canadians, and 90 cents less than Brits), there’s the inconvenient truth that one of the major factors propping up oil prices is U.S. foreign policy.

Consider Venezuela. As Bloomberg’s Liam Denning pointed out, the home of the world’s largest oil reserves has made an outsize contribution toward OPEC exceeding its production cut targets — not surprising, given that Venezuela’s production has fallen by more than a half a million barrels per day since the start of 2017. Beyond the incompetence and corruption of the Nicolas Maduro regime, U.S. economic sanctions are a big reason for that drop-off.

It’s possible that Trump could ease those sanctions to provide price relief to American drivers. But with a (rigged) Venezuela election coming up in May, the Maduro government is likely to become even more of an international pariah than it already is. More U.S. sanctions, rather than fewer, are the likelier outcome.

Then there’s the Iran nuclear deal. One obvious impetus for the oil rally is the expectation that Trump will refuse to continue waiving sanctions when his next review of the Joint Comprehensive Plan of Action rolls round on May 12. This is not an unreasonable expectation, given that the president has called the JCPOA “the worst deal I’ve ever seen.” (You thought that was NAFTA? No, it’s “one of the worse deals, ever.” You can see the difference.) Meanwhile, neither recently nominated secretary of state Mike Pompeo nor national security advisor John Bolton is exactly a fan; Bolton has called the JCPOA “execrable.”

Still, Trump might live up to U.S. commitments under JCPOA and continue the sanction waiver. That would keep Iranian exports (a million barrels a day, as of early February) flowing, and might alleviate some upward price pressure. Even if that happens, however, there will be more tough talk from the U.S. about the need to “fix” the deal or else. And you can expect oil markets to continue to play JCPOA as an agreement under constant threat of immolation.

Here’s the upshot: short of sparking an all-out, global trade war that will derail demand growth — and admittedly, that’s not beyond the realm of possibility — it’s hard to see Trump doing much to stop oil prices from being “artificially high.” To do that, he would have to abandon two planks of his administration’s foreign policy — which, as much as they distort market forces, are probably more important to the U.S. than even cheaper gasoline.

So this oil price rally looks like it could have more legs. Whatever Trump tweets.