Following Davos, Trump Could Cut Major Oil Price Deal With Saudi Arabia
After outlining an economic mandate at the Davos conference, President Trump might turn to a Middle East partner to lower oil price.
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President Trump never shies away from telling the world, or rather demanding, what he envisions for the United States of America.
At Davos, virtually, he made a few bold statements about his vision for the future and how he desired lower interest rates. Of course, any president or business leader would do the same, as lower interest rates mean looser financial conditions and more prospects of economic growth. But it is not as clear cut and simple as that.
The Fed knows that all too well as they would love nothing more than to bring rates down as soon as possible, to lower the interest expense bill that is nearing north of $1 trillion at these levels. It spent the majority of 2022 bringing inflation down after losing control, and the last thing it needs is to cut too much, too soon. Once that genie gets out of the bottle, it will be hard to put it back in.
So, how will Trump "convince" the Fed, or rather "give" the Fed, ammunition to cut rates more? The answer is: the oil price!
The oil price has been both the Fed and the president’s nemesis, as the higher it goes, concerns on inflation rise, which ties the Fed’s hands when it comes to easing rates. The oil price has been flat and in a range for the last three years, and OPEC+ has tried very hard to keep it stable around $70 per barrel (BBL). It has kept about 3 million barrels per day (MBPD) to 4 million MBPD of pil production on the sidelines via its "voluntary" cuts.
Its aim has been to cut production, allowing the price to rally, and then release it as China came back to demand post-COVID. But China's demand recovery has been tepid and OPEC+ keeps pushing the release date out further and further, waiting for that demand to return. But soon there will come a time when all of its investment expansion will need to be monetized, as some members are getting frustrated as they are literally subsidizing the profits for other non-OPEC+ producers. This is what has capped any oil price rally.
We have opined that the more suitable route over the past few years would have been for Saudi Arabia/OPEC+ to release their oil once and for all, allowing the market to find a true natural floor — short-term pain allowing for long-term gain. Lower prices could boost demand for exporting countries, not to mention lower inflation globally too. But they could not risk the price falling, given that Saudi Arabia country has fiscally planned its projects based on a much higher oil price. They seem to be boxed in a bit.
Recently, as the year started, oil has rallied from high $60s to high $70s on the back of sanctions on Russia placed by Joe Biden before he left office. Demand has yet to show signs of picking up, but the supply side quickly moved to price in a change.
As the war in Ukraine has taught us, sanctions just allow oil to move via alternative routes, forcing exporters to be more creative. There is no shortage of oil, as what is lost by Russia or Iran can be made up by Saudi or OPEC.
Perhaps Trump’s agenda is to get OPEC to pump more at the cost of Iran and other contentious nations. Trump could give concessions to Saudi Arabia in business on the condition it releases more oil, which could be a win-win for both sides. Is it not ironic that Saudi Arabia just announced that it would invest $600 billion in the U.S.? Perhaps the writing is on the wall.
At the time of publication, Bengali had no positions in any securities mentioned.
