First, Saudi Arabia put its market share for crude on the line. Now, it's threatening to risk decades of its relationship with the United States just so that it can sell oil at the price it wants.
The question is: what will Donald Trump do in retaliation?
As the tussle for control of global oil prices intensifies, both the U.S. president and his allies in the desert Kingdom, including the seemingly ruthless Crown Prince Mohammed bin Salman, are playing for stakes that are unprecedented in the more than 75-year diplomatic history between their nations.
A Reuters report on Friday indicated that Riyadh has raised the ante in its showdown with Washington, threatening to sell its oil in currencies other than the dollar if Washington passes a bill exposing OPEC members to U.S. antitrust lawsuits.
The move is to counter the NOPEC (No Oil Producing and Exporting Cartels Act), which some U.S. Congressmen are urging Trump to use against the Saudi-led OPEC.
OPEC and 10 other oil producing countries—separately led by Russia—have been cutting production since the start of this year, restoring the bulk of the 40% price drop that global crude benchmarks WTI and Brent suffered in the 2018 oil market crash. Gasoline futures have jumped even more—almost 50%—causing a spike in pump prices that could soon hurt American wallets as Trump prepares for his re-election campaign.
According to Reuters, which quoted sources familiar with Saudi energy policy for its story, the chances of the Saudis ditching the USD for their crude trades was as unlikely as the U.S. using NOPEC to regulate global oil supplies and get the price per barrel that would work for its own economy.
Bold Saudi Gamble
But the recent moves tell the damage Saudi Arabia is willing to do—undermine the dollar as a reserve currency, ditch the riyal’s peg to the greenback, reduce Washington’s clout in global trade, weaken the U.S.’s ability to enforce sanctions on other states and divest nearly $1 trillion of Saudi investments in the United States—if the Trump administration wanted a fight.
They also show how badly Riyadh needs oil to get back to around $80 per barrel or more—note that global benchmark Brent went above $70 momentarily on Thursday before falling back—so that the Kingdom can fund its annual budget and continue providing both its royals and commoners with lifestyles few nations can only dream of.
The stakes in oil for Saudi Arabia are also higher than ever since the establishment of diplomatic ties with the United States in 1933. After years of planning and dithering, the country is now ready for a public sale of shares in its $356 billion-per-annum state oil firm Saudi Aramco. A strong oil market is critical for that IPO.
As aforementioned, the aggressive production cuts by the Saudis could cost them market share for their Arab Light oil in South Korea, India and other Asian destinations, as comparable U.S. shale oil rushes in to fill the vacuum. U.S. crude exports reached a record high of 3.6 million barrels per day in March and are forecast to grow explosively through 2025, when the United States is projected to produce more than Saudi Arabia and Russia combined. Riyadh has so far put a cool public face to the competition.
But back to the central argument: how will Trump possibly react to a continuous oil rally?
Trump’s Oil Tweets Not Really Working
Crude at above $70 a barrel, let alone $80, will likely set off a chain of reactions from the president.
While the Saudis appear to have won Round 2 of the "Tweet Threats"—with hedge funds giving just a few cents in concession on the flat price of oil after Trump fired off his latest friendly-warning to OPEC a couple of weeks back—there’s enough evidence of this president resorting to bizarre acts when his back is against the wall.
Some predictions have him selling—or at least threatening to offload—oil from the U.S. Strategic Petroleum Reserve to get the market back lower. Few, however, believe he will gamble with such emergency supplies.
The most popular theory is that he’ll sign away another round of generous waivers to buyers of sanctioned Iranian oil when their export permits expire this May. His administration talks of “zero Iran oil” exports, but no one believes that either.
Could The President Have An Iran Ace To Play?
Yet, Trump could go beyond all that. He may resort to the ultimate trump card by suggesting the U.S. is willing to sit with Iran if Tehran wishes to avert further economic crisis from its nuclear program. The mere notion of a U.S.-Iran nuclear agreement 2.0 that would let Tehran export its crude again with freedom, albeit even with some restrictions, could drive the flat price of oil down by between $5 and $10 a barrel.
However, there are many reasons why such a deal may not happen. The negatives include Iranian President Hassan Rouhani’s own displeasure with Trump compared to his predecessor Barack Obama, as well as protests from Israel. Central to the U.S.'s Middle East policy has been its historic relationship with Saudi Arabia and Israel to balance Iran’s regional ambitions.
Yet, Trump being Trump, he could propose talks with Iran just to plant the seed of fear into hedge funds that now appear bent on driving crude back to the highs before the crash of October 2018.
No one expected Trump to sit with Kim Jong-un within a year of trading barbs with him, although the summit with the North Korean leader hasn’t gotten Washington anywhere near its objective of nuclear disarmament in Pyongyang. For better record, so far Trump has played the Chinese play ball with him on trade talks.
An offer to negotiate with the Iranians wouldn’t hurt Trump, especially if Tehran warms to the idea. After all, Obama did the same.