The Fuse

Sanctions, OPEC Cuts and Trump Tweets Show Oil Price Volatility Is Not Dead

by Alex Adams | @alexjhadams | February 26, 2019

Yesterday morning, President Trump tweeted his latest message toward OPEC, urging them to stop raising oil prices in order to protect a “fragile” world that cannot handle a higher oil price. Telling the cartel to “relax and take it easy,” the president expressed his concern that oil prices are “getting too high.”

The tweet heightened speculation that volatility is returning to the global oil market. New U.S. sanctions on Venezuela’s oil industry, alongside the Trump administration’s renewed ambition to “drive Iranian exports to zero” has seen oil prices rise 22 percent in 2019. Futures in New York fell by as much as 3.8 percent following the president’s tweet.

Vitol, the world’s largest energy trader, expects prices to rally further due to a combination of American sanctions on Venezuela and Iran, and continued OPEC cuts. As a result, there will be a shortage of the low-quality heavy crudes which refiners rely on. “Oil supply is going to be pretty tight until the third quarter,” Vitol CEO Russell Hardy told Bloomberg, adding, “The OPEC decision has meant there’s less available, the Iranian situation has meant there’s less available, and the Venezuelan situation now is adding to that.”

OPEC and its allies appear to be resistant to President Trump’s tweet. Under a deal struck in December by the 14 OPEC nations and 10 non-OPEC countries led by Russia, a pledge to cut supply by 1.2 million barrels per day from October levels began in January. The production cutbacks are to last six months, with a reassessment due in April. However, an OPEC official told the Wall Street Journal yesterday that “under current market conditions, I see only reasons to extend the cut after April.”

President Trump’s latest OPEC tweet comes as his administration announced its intention to introduce “even stronger sanctions” on the financial networks of Venezuela’s Nicolas Maduro. Speaking to the Lima Group, a coalition of 12 nations formed in 2017 to establish a peaceful exit to the Venezuelan crisis, Vice President Pence said, “We will find every last dollar they have stolen and return that money to the Venezuelan people,” urging the Lima Group to freeze assets of state oil company PDVSA.

But the truth is oil volatility never went away. Ed Morse, Citigroup’s global head of commodities research, warned recently that we can continue to expect swings of plus or minus $20 “on a regular basis”. Citing Q4 2018’s fall in prices, with Brent dropping from $86 in October to $50 by Christmas, Morse added, “We have wild swings that are much more wild than they have historically been.”

U.S. shale production cannot fill the gaps left by the decline in heavy crude production from Venezuela and Iran. Morse echoed Hardy’s observation that there is a “mismatch” between the types of heavy oil refiners use, and the light, sweet crudes that are coming out of American unconventional production. The configuration of global refining is “designed for incremental supply medium-sour crudes,” he added, whereas much of the incremental supply today is from lighter U.S. shale varieties.

A factor that could limit volatility would be the introduction of the No Oil Producing or Exporting Cartels Act (NOPEC), which would amend the Sherman Act to allow the executive branch to prevent OPEC from using a sovereign immunity defense and the Act of State doctrine to evade U.S. antitrust law. The threat of NOPEC legislation has already altered OPEC behavior: on the advice of lawyers White & Case, OPEC members no longer mention oil prices when discussing policy, referring to market stability instead.