It’s an audacious move few would attempt, but U.S. President Donald Trump is counting on Saudi Arabia’s help to fill any oil supply gap caused by his sanctions on Venezuela, while trying to prevent the "desert kingdom" from getting greater help from Russia to lift crude prices.
Refiners on the U.S. Gulf Coast squeezed by the absence of Venezuelan oil have been told by White House officials not to expect any crude release from the Strategic Petroleum Reserve because they are "certain" the Saudis will boost crude exports to the U.S. in the coming weeks, energy reporting service Platts said on Thursday, citing a Trump administration source.
As Platts points out, what makes the U.S. position remarkable is that Saudi officials have indicated no plans of making up for any shortfall in Venezuelan supply, as the OPEC cartel they influence closely has been busily cutting output to boost prices.
U.S. Senators Propose 'NOPEC' To Fight OPEC+10
At the same time, a bipartisan group of U.S. senators have put together a bill for the Justice Department to sue members of OPEC for antitrust violations if the cartel tries to formalize its oil cooperation pact with Russia. The acronym for the U.S. bill, interestingly, is “NOPEC”, standing for “No Oil Producing and Exporting Cartels Act”.
The Wall Street Journal reported on Tuesday that the Saudis particularly hope to formalize the so-called OPEC+10 alliance between the cartel and a Russia-led group of ten oil producers for better control of global crude prices.
OPEC+10 has succeeded twice in the past three years in bringing oil prices back from multi-year lows, with U.S. West Texas Intermediate crude now trading above $52 per barrel, from December lows beneath $43.
But Bloomberg reported on Wednesday that Russia was dragging its feet in complying with the latest exports cuts it had committed under the alliance, prompting an impatient Saudi Arabia to come up with a formal plan to try and improve Moscow’s adherence. Even before the negative reaction from the U.S. Congress on Thursday, Russian Foreign Minister Alexander Novak had balked at the Saudi plan.
To Trump, Saudis Offer Perfect Solution For Venezuela Crisis
In Trump’s mind, the Saudis offer a perfect solution for the Venezuelan crisis since the Kingdom produces the same kind of sulfur-laden heavy crude as the South American country—needed by U.S. refiners to blend with lighter crudes in order to produce diesel and other transportation fuels. Canada has an abundance of the so-called “sour” crude but lacks enough pipelines to ship more of it to the U.S.. Iraq, Colombia and Mexico have similar oil as well, but none can match the Saudi capacity.
While it’s certainly logical for Trump to rely on his most important Middle Eastern ally to help out in an energy crisis, the Saudis might feel little sympathy for a president who is counting on their goodwill while showing no remorse in hurting their economy, which desperately needs oil prices to be nearer to $80 per barrel.
Says Phil Flynn, energy analyst at The Price Futures Group brokerage in Chicago:
“If there’s one person who’ll have the nerve to do this, it’s Donald Trump. His hate for OPEC’s cartel-like ways is well known. Balancing that with the important Saudi relationship has been his problem because Saudi and OPEC interests are intertwined.”
A Familiar Tale
To the average observer, the U.S.-Saudi drama is an all-too familiar soap opera making a rerun barely a year after its first showing. The difference is that the first season had Iran as the foil instead of Venezuela.
Having canceled an Obama-era nuclear deal with Iran and applying sanctions on the Islamic Republic’s oil exports, Trump had exhorted Saudi Arabia—which had just managed to lift oil prices to above $60 per barrel from the first round of the OPEC+10 cuts—to raise production to fill the vacuum left by Tehran.
By the time the extra Saudi barrels hit U.S. shores, Brent crude, the global oil benchmark, was closer to $90 a barrel and Trump—fearing a backlash over high pump prices during U.S. midterm elections—issued surprise waivers on Iranian oil exports. The result was a market crash on fears of oversupply, with record U.S. shale oil production rendering a perfect storm for the Saudis.
When Riyadh contemplated output cuts, Trump began tweeting that it shouldn’t, adding to the price collapse. The killing of Saudi citizen Jamal Khashoggi, who was also a journalist residing in the U.S., added to the bizarre mix, fueling the perception of a Riyadh beholden to Trump and less inclined to defy him with output cuts if it wished to avoid reprisal for the murder.
Of course, the Saudis have since slashed more barrels to the U.S. than any skeptic could have imagined, now making Khashoggi seem almost like an inconsequential factor in Riyadh-Washington relations. Since the OPEC+10 cuts began in December, Trump also stopped tweeting about oil prices or intervening in the market—until the Venezuelan crisis cropped up.
No Certainty Riyadh Will Play To Trump’s Game This Time
Déjà vu aside, the crisis in Caracas is rather different from the Iranian one, in the sense that Trump won’t—and can’t—issue waivers, since removing Venezuelan President Nicholas Maduro, seen globally as a dictator, is the overarching objective.
The question, therefore, is what do the Saudis gain in helping Trump? And would they risk raising exports to the U.S. once again, just as the market has begun taking their production cuts seriously?
There is also the question of how much spare capacity the world’s largest oil exporter has, with some reports suggesting that with the production pullback since December, the Saudis will have problems putting more barrels on the market quickly.
Says Flynn of The Price Futures Group: “No one really knows how this is going to end. Not even the President.”