Complex Made Simple

Like it or not, Trump controls what you pay at the pump

9,351 km is the approximate distance between the White House at 1600 Pennsylvania Ave and the GCC, but US president Trump might as well be standing next to you as you pump gas into your non-EV.

He is responsible for most of the reasons why oil prices are volatile.

Summer’s oil boil

With financial market headlines continuing to be dominated by various uncertainties, including and not limited to the ongoing trade war tensions mainly between Trump and China, aspects of geopolitical risk and the unpredictable nature of Trump’s social media feeds, it is unlikely that market volatility will calm down any time soon, said Forbes.

Morgan Stanley sent a recent note sent out specifying that 2018 is on track to be the most volatile year for the financial markets since the 2008 global financial crisis.

“A similar evaluation can be provided for the oil markets when you consider that the US (WTI) commodity has fluctuated from commencing 2018 below $60 to later climb towards levels not seen since 2014 above $70, before later declining back to the lower $60s and then reversing course once more,” said Forbes.

In essence, investors feel they have lost control over financial market conditions due to mostly external factors such as trade tariff war scenarios which could expand to becoming global.

The threat of a trade war represents the largest risk for the global economy and means that demand for commodities would be at threat of declining, or increased risk of less demand for oil.

Related: Can anyone stop Iran’s oil chokehold?

There are political risks associated with Trump tweets regarding Iran sanctions, and previously threats of “fire and fury” against North Korean nuclear strikes against US assets in the region.

According to Forbes, a positive sign for investors is the news on Wednesday, July 25 that President Trump is open to discussing a new nuclear deal with Iran.

“In addition, the improved relationship between China and the UAE comes at the right time when increased protectionism has resulted in several trade barriers on trade,” said Forbes.

“China President Xi Jinping’s visit to the UAE last week coincided with OPEC’s decision to increase crude oil supplies amid strengthening demand, triggered by sanctions the US has imposed on Iran, as well as Venezuela’s oil industry woes.”

Forbes said that another factor to consider is how vociferous is President Trump on OPEC and the oil prices on his twitter account. His view remains that the oil prices are too high, and it should be significantly cheaper than it is.

He has also tweeted that he is in agreement with Saudi Arabia on its decision to pump another 2 million barrels of oil per day.

“If this comes to fruition, this would be seen as a major negative for the oil markets. Saudi Arabia was reported to have increased production last month to its highest levels in three years,” said Forbes.

Both Russia and Saudi Arabia could increase oil production significantly over the second half of 2018 “and this would lead to oversupply in the market that previously pushed the price of oil to historic low levels ($27-Jan 2016).

Related: What is causing crude oil prices to cave in?

Oil prices down

Oil prices slipped on Tuesday after a report showed that OPEC production reached a 2018 high in the month of July, although the losses were limited as concerns about supply lingered, reported Arab News.

September Brent crude futures fell 7 cents to $74.90 a barrel, after rising 68 cents, or 0.9%, on Monday.
US West Texas Intermediate crude futures (WTI) were down 6 cents at $70, after rising more than 2% in the previous session.
A Reuters’ survey showed OPEC increased production in July.
OPEC hiked production by 70,000 barrels per day to 32.64 million bpd, a 2018 high.

Read: Iran proxy begins oil war that could drive prices to $250

OPEC Oil-Cuts compliance slides

Saudi Arabia and Russia succeeded in late June in convincing OPEC and its allies to boost oil production — though by then the two nations had already opened the taps, accordingto Bloomberg.

“Saudi compliance with previously agreed output curbs dropped off the charts, falling to a rate of 265 last month. Russian adherence also slumped, to 55%. Here’s a look at OPEC and non-OPEC compliance in June, the 18th month of oil cuts.

Below graphs are courtesy of Bloomberg

OPEC agreed on June 22 to scale back to “only” 100% compliance starting from July. That effort was already underway in June, and members differed on whether that goal applied to the group collectively, or only on an individual basis. OPEC’s rate dropped to 126% in June, from 159% previously. Non-OPEC adherence fell to 61%.

Expert analysis: Are crude oil bulls back in town?