By: Ebrahim Fallahi

Oil’s love triangle ends up with Trump in tears

December 8, 2018

These days whenever there is talks about oil market three names are inevitably come to surface, the U.S. President Trumps, Russian President Putin and Saudi Crown Prince Mohammed Bin Salman.

This goes to an extent that some even say OPEC has lost “what control of the oil market it ever had” and the whole market is being controlled by these three and whatever goes on between them would eventually reflect on the oil prices and the market in the future.

This made me to take a look at the events of the oil market in the past few months up to the OPEC’s 175th meeting in Vienna in which once again the cartel stretched some muscles to leave many in shock, pushing oil prices up near five percent.

After two days of meeting involving tense discussions and persuasions, OPEC and oil-producing allies known as OPEC+ finally agreed on Friday to cut production by 1.2 million barrels per day (bpd) despite pressures from Trump to maintain current output levels to keep prices low.

Based on the OPEC+ announcement, Saudi Arabia will shoulder most of the cut that is 800,000 bpd while Russia, which has been an important player in global oil markets, and other non-OPEC producers will bear the rest.

By agreeing on a level of cuts which was even deeper than expected, once again OPEC succeeded to surprise the market, a decision that definitely is not going to please the third musketeer which is probably already preparing his next tweet cascade.

Bin Salman and Trump scenario

When Trump decided to leave Iran’s nuclear deal, his decision was like the sweetest of melodies to Saudi Crown Prince Mohammed Bin Salman’s ears.

Trump was claiming to cut Iranian oil exports to zero and his best buddy bin Salman was Trump’s main chess piece to succeed in his game against Iran. Eager to hit his country’s arch rival hard, the young crown prince ordered for an increase in oil production without any hesitation; so that very soon Saudi Arabia’s oil output exceeded a record high of 11 million bpd. They even tapped into their strategic resources to show Trump their full support for his plans.

The U.S. president on the other hand, happy with his success in the kingdom, cheered for his country’s shale drillers which were going on full force flooding the oil market. In Trump’s world everybody was happy until warning alarms started to wail.

Soon with Saudis on full capacity, Shale drillers on the clock and the rises in output from some other oil producers like Iraq and Libya, the market was flooded by oil.

On the other hand, China, India, South Korea and Japan bewildered after being forced to cut their Iranian oil imports temporarily halted their oil imports while trying their best to convince the U.S. for granting them waivers over Iran sanctions.

The escalation of the U.S. trade war with China was also starting to show its impacts on the world’s economy in the form of lower oil demand.

All the above mentioned factors joined hands and consequently, in less than few months the oil market headed toward a state of shock so that the prices started to fall drastically. Oil which was traded near $87 in early October fell near 22 percent only in November to drop under $60. The oil market was starting to panic over the situation.

Starting to see the consequences of his actions, in early November Trump announced a decision to grant waivers to eight countries to continue importing Iranian oil.

Greece, India, Italy, Japan, South Korea, Taiwan and Turkey were exempted from the U.S. sanctions on Iran’s oil industry.

As much as Trump’s decision calmed the market it shocked the Kingdom to the core. Feeling betrayed and played by Trump, soon Saudi Arabia announced a decision for cutting its oil output by 1 million bpd in December.

Even though, it was just an expression of anger toward Trump, the Saudi’s announcement further supported the oil prices which once again rose the concerns over higher oil prices for the U.S.

The situation grew tenser resulting in a slight war of words between the two sides. However to Saudis misfortune the Khashoggi incident happened and turned all the tables against the kingdom.

The murder of Jamal Khashoggi become a leverage for Trump to pressure the crown Prince to retreat from his position in wanting to cut his country’s oil output.

Soon after, feeling the Trump’s pressure Saudis postponed their final decision to the 175th OPEC meeting in Vienna.

Putin and Bin Salman scenario

After the Khashoggi incident, the market went into a phase of calmness and all eyes become fixed on the 175th OPEC meeting and the G20 summit which were going to be held with less than a week interval and in which all the key players were gathered.

Aside from its importance for oil market, the G20 summit was going to be a test for the Saudi crown prince since it was his first appearance on the international stage since the Khashoggi incident.

The test however was proved to be a real slap for the Saudi prince, so noticeable that BBC in a report wrote:

“Not only did MBS’s traditional sartorial taste stand out amid “a sea of suits,” , Saudi Arabia’s de facto leader’s very presence in the Argentinian capital seemed to be adding a “toxic” touch to the reunion of the world’s powerful.”

on the day of G20 summit, footage and pictures went viral of the Saudi’s utter isolation at the Buenos Aires summit.

However, finding the perfect situation to take advantage, Putin came to rescue the isolated crown prince from the awkward situation he was drowning in.

A simple “high five” was all needed to put a huge smile of satisfaction on the wounded prince’s lips.

This act of friendship changed everything around the crown prince, since, to quote FT, he managed to "escape diplomatic isolation and even enjoy some sort of international rehabilitation.”

Being a very smart politician, Putin is known for his tactical behavior and keeping both friends and enemies close. Maybe without this seemingly simple act, the Friday’s OPEC+ meeting would have had a complete different result.

Putin successfully seized the moment to defeat his powerful rival Trump and pulled the prince into his corner, assuring his all-out support for him to defeat Trump and announce the Kingdom’s decision on output cuts in the 175th OPEC gathering in Vienna.

However, during the meeting, the deal was hung in the balance for two days. First because apparently Russia was expecting the Saudis to shoulder all the cuts alone in exchange for their support, and secondly Iran, whose crude exports have been depleted by U.S. sanctions, objected to bear any cuts.

But, eventually Russia came to see the fact that it would be more beneficial for them to both back Saudis against the U.S. and also keep its ally Iran happy with the results. So they agreed to collaborate with the cartel in any possible way.

What about Iran

With all this drama going on around, Iran was the one who finally caught the bouquet, according to the latest reports from Vienna, Iranian Oil Minister Bijan Namdar Zanganeh announced that the country has been exempted from any cuts.

Furthermore, removing 1.2 million barrels of oil from the world markets will help the prices to go up again and this would help offsetting the value of Iran's lost barrels.
As Reuters reported “an output curtailment also would provide support to Iran by increasing the price of oil amid attempts by Washington to squeeze the economy of OPEC’s third-largest producer.”

On the other hand, the U.S. and China moving toward less tense relations, as well as the eight countries which are granted sanction waivers to continue buying Iranian oil all and all are factors which point to a more desirable position for Iran’s oil industry in the future.

In the end what should not to be forgotten is “Trump”, the heartbroken musketeer does not seem to be sitting on his thumbs while his golden prince is off to a happily ever after with his Russian nemesis.

We should wait and see, what Trump is going to do to lure MBS back. Is the Khashoggi case still work? or the Prince has left the Kahshoggi shadow behind in G20 summit?

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