$100 Crude Oil? Trump And OPEC On A Collision Course

Posted Saturday, September 29, 2018 by
Shain Vernier • 3 min read

It appears that U.S. President Donald Trump and OPEC are headed for a showdown over growing energy prices. On Friday, November WTI crude oil futures closed at $73.25, the highest level since the boom years of 2010-13. The late-week rally followed a positive EIA Crude oil stocks report on Wednesday and strong verbiage from Trump at the U.N.

Traders are beginning to talk that $100 crude may become a reality in the near-term. The markets have reacted to the buzz accordingly.

November WTI Crude Oil Futures (CL), Weekly Chart
November WTI Crude Oil Futures (CL), Weekly Chart

If we have learned one thing about President Trump, it is that he is outspoken toward anything business-oriented. Economic growth is largely dependent upon two things: the availability of capital and energy. Trump’s economic agenda is being challenged on both fronts.

Wednesday brought us the first real look into what the U.S. Federal Reserve (FED) has planned for the next two years. After an expected rate hike to 2.25%, a bump to 2.50% in December was assured. In addition, the FOMC dot plot projected at least three rate hikes for 2019. Tight policy is no good for business growth, and the commercial lending scene is certain to become much tighter in the next 18 months.

Do rising oil prices and hawkish FED policy further the case for lagging 1.8% U.S. GDP by 2021? The answer may lie in the evolving Trump/OPEC relationship.

OPEC vs Trump

Earlier this month, the OPEC meeting at Algiers pledged to hold current production levels stagnate. This decision was much to the dismay of Trump, who publicly blasted them last Tuesday. Before the U.N. General Assembly, Trump stated the following: “OPEC and OPEC nations are as usual ripping off the rest of the world, and I don’t like it. Nobody should like it.”

The sentiments are certainly echoed by many, but in practice, what can Trump do to change the situation? A potential answer may be lurking in another statement from Tuesday: “We [USA] defend many of these nations for nothing, and they take advantage of us by giving us high oil prices. Not good.”  

This is an interesting statement. Is Trump suggesting that current military alliances may be up for renegotiation? A sort of tit-for-tat deal, trading protection for affordable energy? Time will tell, but I don’t rule anything out.

A Look At The News…

As traders, reading between the lines is a big part of our job description. Last week gave us some great food for thought in the WTI markets. Following Trump’s statements to the U.N., there were several late-week big oil headlines dominating the news feed:

  • “Saudi Oil Company Aramco Set to Boost Oil Production By 550,000 Bpd For Q4”
  • “Iraq To Produce 60,000 Bpd From Newly Restarted Oil Field”
  • “China’s Sinopec Halves Iran Oil Loadings”

Each of these stories are positive reports in terms of potentially larger supply streams. The Aramco boost in production is surprising. Saudi Arabia is the lynchpin of OPEC — increasing output after the meeting in Algiers counterintuitive. Is this the beginning of fresh dealings between U.S. interests and Aramco/Saudi Arabia?

New oil fields coming online in northern Iraq suggest that efforts to eliminate ISIS have been a success. If a hot war with the Islamic State now out of the picture, the reopening of previously contested regions may put even more supply back on the table.

Sinopec decreasing imports from Iran shows that China may be feeling the strain of U.S. intervention. Amid a hot trade war, it is plausible to think that Chinese companies would be free to conduct business-as-usual. This does not seem to be the reality of the situation.

Bottom Line

When taken with last week’s positive EIA Crude Oil Stocks Report, these news items make the case for bullish crude seem a bit thin. With fresh supply set to come online, demand due to shrink seasonally, and the Trump Administration ready to become active in global oil, isn’t the short side of WTI a safer bet?

From my view, absolutely. It appears that price is going to put in a hard test of $75.00, more than likely this coming week. Be on the lookout for heavy action and consolidation in the $74.00-$76.00 range.

$75.00 makes a lot of sense as the new intermediate-term benchmark for WTI. North American fracking operations and OPEC can sustain nice profits. In addition, U.S. gas prices will not rise much above $2.85 per gallon and the current economic growth cycle will continue.

Make no mistake, many will complain about the prospect of long-term $75.00 WTI crude. But, $75.00 is much better than $100 — when the dust clears, Trump, OPEC, and everyone at the global oil table will gladly take it.

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