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Sunday, 28 April 2019 21:16

PICK UP THE PHONE OPEC, ITS DONALD

Written by

The gasoline prices are coming down. I called up OPEC. I said, ’You’ve got to bring them down. You’ve got to bring them down’, and gasoline’s coming down,” US President Donald Trump's call to OPEC has created much debate. It is now clear that no such call took place. We no longer need to attempt to divine the actions of a President that full in the knowledge that his mis-speak would be exposed, he seems powerless to overcome his impulsive behavior.

The significance is however not that no such call was made, but that Trump has created the narrative that OPEC are the villans, the cause of high gasoline prices and restricting OPEC is the solution to reducung high gasoline prices. Such a narrative effectively exempts US foreign policy from any culpability in the increase in gasoline pricing. Trump asserted erroneously that as a consequence of his call to OPEC, gasoline prices had began to fall. The simple fact is that schitozphrenic US foreign policy is the definitive reason for increase in global oil prices

US foreign policy has been key in creating the geopolitical uncertainty which has seen crude prices increase by around 32%
over the last 3 months and has driven up the pump price of gasoline in the US. The US decision to provide waivers to consumers of iranian crude at short notice had the effect of crashing the global oil prices. That resulted in OPEC having to cut production. The US have now signified its intent to remove Iranian crude from the market. This requires the co-operation of principally Saudi Arabia and the U.A.E but it is far from clear whether a solution which involves the Saudis pumping more oil would meet the needs of the market.

It is simplistic to view a solution which just replaces barrels from one source with those from another as being adequate. There are financial factors to consider, not least freight costs and grade differentials. Japanese refiners are concerned that they will lose discounted iranian crude and have higher freight costs. The Chinese are by no means happy and it remains to be seen just how readily they will comply with sanctions unilaterally imposed on Iran despite the fact China are still signatories to the Joint Comprehensive Plan of Action (JCPOA). The EU despite its initial rhetoric appear set to comply.

In an earlier episode of telephone diplomacy President Donald Trump indicated in a phone call with Libyan Warlord Khalifa Haftar last week that the he supported an assault on the country’s capital to depose its United Nations-backed government undercutting his own Secretary of State remarks on US policy in the process. Setting aside the wisdom of choosing sides or provoking conflict, the potential effect of the reduction or loss of Libyan production alone may push the Brent benchmark oil price to over $80/b.

Then there is Venezuala, United States sanctions came into effect on Sunday, April 28, though an embargo has existed over the past 3 months as of 12:01 am Washington time (0401 GMT), the United States will take action against anyone who deals with state-owned Petroleos de Venezuela, (PDVSA) or any entity in which the company holds at least a 50% stake. Until the crisis, Venezuela exported 500,00 barrels a day to the United States, its largest customer, with PDVSA omnipresent, if not highly visible, through ownership of the Citgo refining and gas station chain. The embargo will potentially take 900,000 barrels of heavy crude off an already tight market.

It now seems clear that the market now needs to price in Trump's propensity to provide misleading information as well has his twitter posts. Beyond moving the markets Trumps mis-speak creates momentum and volatility. Thus, Trump’s comments were in effect a trigger for bulls to sell off. With falling prices, there was apparently a lot of “long-covering,” that is, traders with long positions that needed to be closed out, by selling into the market, which made the downward price move that much sharper. The closed weekend market also encourages Friday traders to get out of their positions to avoid losses should news over the weekend be unfavorable.

Trump is creating uncertainty in the market with his tweets and more recently his phantom phone calls as his over aggressive and incoherent foreign policy. the rationale fuelling Trump's actions is his need to deliver cheap gasoline prices to American consumers. Achieving this objective he believes would help shore up his popularity and improve his second term elwction prospects.

 

 

 

 

 

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