23.06.2018 Author: Grete Mautner

Trump’s Tweet Forces Oil Markets to Take a Plunge


As you must be aware of, oil is among the main driving forces behind today’s economy, since it can not be easily replaced by any other resource in those areas where it is most widely consumed.

Oil prices determine the cost of a wide range of products and have a strong influence on both the economy of a certain state and on its foreign policy. However, what some people may not be aware of is that oil prices dictate the price of natural gas.

Although it is generally believed that the price of any product is determined by the supply and demand equilibrium, we shouldn’t take fear out of this equation. As for fears that brokers have on the international oil markets, those are close connected with the steps the United States take on the international stage. Today Washington impose sanctions on yet another oil producing country under some convenient pretext, tomorrow it will try to stage yet another “color revolution” in some far away country, next week it will start bombing by announcing that it’s not democratic enough. Predictably enough, brokers try to follow the state of relations between Washington and the Persian Gulf monarchies, the situation in Iraq and Libya that still remain largely devastated by war, along with the situation in Iran and Venezuela. To be more precise, the dissatisfaction of the United States with Iran’s behavior and the unpredictable development of anti-American-anti-capitalist movement in Venezuela.

Under these conditions, OPEC and the agreements of the largest oil producers (OPEC +), although they still play an important role in determining oil prices, are miles from being the deciding factor of today’s oil prices. This means that oil prices are largely imposed on OPEC by the United States.

Additionally, oil prices are strongly affected by the assessment of available storage of oil and gas that can be easily produced. This assessment, largely affected by Washington’s oil giants, can suggest that there’s a deficit or over-saturation on the international oil markets. Further still, American oil companies have managed to master profitable extraction of unconventional oil and gas deposits, including shale and similar hard-to-recover reserves. Until recently, their development was unprofitable, but the development of new technologies made it possible, with massive introduction of such rigs making these technologies cheap so that the development of previously unprofitable oil and gas reserves become a reality. That is why the widely advertised thesis about oil markets heading into deficit can be described as far-fetched at best.

According to financial experts, today’s demand cannot match the supply, which may lead to crumbling fuel prices. There’s a visible increase of investments in oil production, which will lead to a surplus of oil hitting the market to push oil prices down, which means that the world can once again enter a phase of high volatility.

These forecasts have been confirmed by an abrupt drop of oil price in mid-June. Some experts are inclined to believe that to a certain extent this drop was facilitated by Saudi Arabia’s increasing production of “black gold”, that came on the back of a two years straight decrease.

However, if one is to take into account all the above listed above, it is hardly appropriate to allocate the blame for the dropping price on Riyadh and its decision to increase production. This notion is confirmed by the fact that just before prices started to drop Trump published a “remark” about OPEC in his Twitter account that reads as follows:

Oil prices are too high, OPEC is at it again. Not good!

To understand the cause of Trump’s particular concern with this issue, let’s figure out who benefits from low prices are good, and who is hurt by low prices.

Everything depends on the point of view. Low prices – are generally bad for all oil-producing countries, the list of which the US has recently joined with its shale oil bonanza. But then why is the sitting US president trying to put a get a foot in the door of growing US exports? Has he been sworn to uphold the interest of his country back when he was being inaugurated?

From the perspective of the oil industry as a whole, low prices are a problem. It should be expected that investments and produced volumes will start to plunge. Today’s decline in prices is the direct result of an excess of oil production, with demand being unable to meet the supply. On the other hand, given the overabundance of raw oil on the market, the future reduction of exploration and production rates will not lead to negative consequences.

However, when Trump voices his “concern” for high oil prices, he’s not acting out of the best interest of his country, which means that he may be pursuing his own selfish goals. One can remember how a number of oil refining companies donated large sums to Trump during his election campaign and now they seem to be willing to see a return on their ‘investments’.

One should also be mindful of the recent failure of American shale companies, that deprived themselves of their huge earnings. The majority of shale oil producers in the United States missed the chance to sell their oil at a price of dollars 70 per barrel, as they were selling futures at a rate of 50-55 dollars per barrel to secure guaranteed revenues to cover their drilling and production costs, which seemed a good price back then. But this deprived them of a chance to take advantage of today’s opportunity to cash in big on high oil prices.

According to the PetroNerds consulting firm, a total of 25 major oil producers will lose about 1.7 billion dollars in total revenues in the second quarter with oil price staying at 70 dollars a barrel. Many of these manufacturers used hedging, that would secure them from 55 to 58 dollars per barrel.

In May, the OPEC report reported that the production of shale oil in the US in 2018 could grow by additional 1.07 million barrels per day compared with 2017, with the overall production reaching 5.76 million barrels per day.

Under Donald Trump, when it comes to international trade, he is beside himself with his attempts to be the main regulator of this trade. Whether it’s oil prices, or trade tariffs. When this happens, he’s capable to provide Wall Street with inside information to give them a head start in any situation. For this reason, the majority of American large businesses are determined to support Trump with his “home” vision of economic policy, according to which their incomes must grow.

In this regard, it is hardly worth explaining that Donald Trump’s actions are not made in the best interests of the United States, but his own best interests. It’s not difficult to track who gets a massive profits on the stock exchange, being fully aware of Trump’s future tweets and steps made on the international stage. The massive oil price drop that was triggered by Trump’s tweet is just a sample of what is going on behind the scenes.

Grete Mautner is an independent researcher and journalist from Germany, exclusively for the online magazine “New Eastern Outlook.