Why We Can Thank Donald Trump for New Oil Price Low
Thanks to a clear understanding of the importance of energy prices and a strong relationship with producers, Trump has a win in oil prices.
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As Joe Biden left office, oil prices were at highs of $81 per barrel (BBL) as he announced fresh sanctions on Russia before his departure.
Biden left an economy riddled with sticky inflation, high debt and higher oil prices. One of Donald Trump's campaign promises has been "drill, baby, drill," but not entirely so. It had more to do with getting the price of oil down, as he knows full well how important energy is to the cost of goods produced and to the inflation index.
U.S. production is averaging around 13.5 million barrels per day (MBPD) and they are growing ever so slightly as there is no incentive to ramp up production given how much OPEC+ had been keeping on the sidelines for years. OPEC+ had taken off about 3 MBPD to 5 MBPD of oil out of the markets since the COVID-19 crisis. This includes the voluntary cut by Saudi Arabia to take off an additional 1 MBPD of oil out of the market, for just a few months, buying time before releasing them back onto the market once China came back to its previous levels of demand.
That was nearly two years ago, and it is still waiting to bring those barrels back on as demand never recovered. Without accepting a secular change in China's demand, using more liquified natural gas (LNG) instead of diesel, and being more price sensitive, OPEC+ kept this oil off the market hoping it would pick up.
This is one of the reasons the oil price was unable to rally sustainably, as the market knew that there was all of this oil waiting to come back. OPEC+ artificially supported higher prices, calling it stability, but what that did was to fund higher cost producers who took market share from them.
The ideal strategy all along would have been to release all of the oil, killing all the high-cost producers, so as to find the right level of oil to generate the right demand. Too fearful to see their revenues drop, they could not risk it, given their future expansion plans that required a fiscal breakeven of $95 per BBL.
There have been quite a few contentious debates within the member group, as some of the parties who had invested in so much capacity were being told to wait and that did not suit them. But Saudi Arabia managed to convince the group to stand pat, allowing a few countries to adjust accordingly, taking the lion’s share of the burden of cuts.
It is no mystery that Trump has a better relationship and track record with the kingdom than Biden ever did. Trump knows full well that, to get oil prices down, he would need OPEC+ to release that oil. The only way to convince them was to go harsher on Iran and Venezuela, allowing Saudi Arabia to increase market share. Since the Russia/Ukraine war began, oil flows have changed as India and China soaked in more Russian oil at the cost of other OPEC+ members.
It remains to be seen whether China can indeed recover and increase its oil demand. Commodities are a strange thing, but they are dictated by demand/supply balances. The longer one tries to control prices, eventually supply finds a way, allowing it to find its true floor.
Brent oil is now below $70 per BBL, the same level as in 2008! Perhaps OPEC+ has realized that demand can only recover if prices are allowed to fall to their true level. This also removes the Fed’s worst nightmare.
All the pieces of the puzzle seem to be lining up. All hail President Trump!
At the time of publication, Bengali had no positions in any securities mentioned.
