- What markets are missing in the radical price swings is that a greater power than Trump, Putin and MBS is at work.
- They face the inescapable force of COVID-19, which for weeks and perhaps months to come will depress the global economy.
- April demand is thought to have dropped by more than 20 million barrels and perhaps by as much as 30 million – a far greater sum than any cuts producers may announce this week.
- In the end, it is more likely that a US government bailout will save the industry, rather than a global market intervention.
Donald Trump has called himself a "war-time" president, referring to his campaign as commander-in-chief against coronavirus. In past days, he has taken on a new role as negotiator-in-chief trying to end the oil-price war that is endangering U.S. shale producers and hundreds of thousands of jobs.
This week's result is an emergency, virtual meeting of OPEC leaders with Russia, Canada and Mexico. It was delayed from Monday until Thursday due to an ongoing Saudi-Moscow dispute about how to address the biggest collapse in global demand and prices since the discovery of the world's first viable oil well in the mid-19th century.
What's decided at that meeting will say much about the limits to the leverage President Trump wields as the world's leading oil and gas producer and with two authoritarian leaders in whom he's invested so much – Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman.
It was the bitter Riyadh-Moscow battle for market share since early March that had prompted a record two-thirds decline in oil prices to $19.27 per barrel for West Texas Intermediate, the lowest point since 2002. Yet Trump's intervention with both men last week, as described to CNBC's Joe Kiernan, had seemed to pay off.
Trump said that he expected OPEC and the Russians to announce cuts of as much as 15 million barrels off the global total of 100 million. Markets rallied on Thursday and Friday to their biggest one-week gains ever of nearly 37% – only for investors to wake up this weekend to continued Saudi-Russian sniping and the possibility of a renewed price plunge this week.
What markets are missing in these radical swings is that a greater power than these three alpha males – Trump, Putin and MBS – is at work. They face the inescapable force of COVID-19, which for weeks and perhaps months to come will depress the global economy. April demand is thought to have dropped by more than 20 million barrels and perhaps by as much as 30 million – a far greater sum than any cuts producers may announce this week.
Never has the world experienced such a double whammy of demand shock and supply surge. In the end, it could be limits to global storage more than Trumpian intervention that shuts off the spigots.
Writing in Foreign Affairs, Pulitzer Prize-winning author and energy expert Daniel Yergin calculates that "virtually every available gallon of storage space in the world will be full by late April or early May. When that happens, two things will result: prices will plummet and producers will shut down wells because they cannot dispose of the oil."
However this remarkable chapter in energy history ends, it's revealing to study what was behind President Trump's dramatic course reversal on how to approach the record decline of oil prices, which he on March 31st called "the greatest tax cut ever given" the American consumer.
Some factors behind this U-turn were the persistent influence of 2020 electoral politics, the little-known role of former Energy Secretary Rick Perry and a threat to a Saudi-owned Texas refinery, and the lobbying power of the American energy industry (and some 2.5 million jobs it's estimated to create).
President Trump began to reverse course when confronted by aggressive lobbying by American oil companies and shale producers that he should apply more pressure on his Russian and Saudi friends to cut their production. His concerns grew further when confronted by the potential impact of energy company bankruptcies on U.S. employment and his own November electoral chances, particularly in Texas.
Most intriguing, as the Financial Times reported Friday, a key individual behind the president's apparent turn was former Texas Governor Rick Perry, who was Trump's energy secretary until the end of last year.
Though Perry had established good relations with his Saudi partners, he advocated that the U.S. block Saudi crude from reaching North America's biggest refinery in Port Arthur, Texas, which is fully owned by the Saudis.
Speaking to Fox News on March 31st , Perry said he would advise Trump to tell U.S.-based refineries to use only American-produced crude for the next two to three months. That would send a "clear message that we're just not going to let foreign oil flow in here," Perry said.
Shale producers had been lobbying the White House at the same time to suspend U.S. military aid to Saudi Arabia and impose further sanctions on Russian energy until the new countries cut their production. They also argued that the president should consider lifting some existing Russian sanctions should Putin play ball and back off his campaign to put them out of business.
However, it appears to have been the threat to the Saudi refinery and to its overall relations with the United States which got Riyadh's attention. When confronted by the possibility that Putin and the Saudi crown prince might not deliver on their production cuts this weekend, Trump upped the ante on Saturday and said he would impose tariffs on oil imports to "protect" U.S. energy workers from an oil price crash.
This would be a win for the smaller and mid-sized producers versus United States' oil majors, who have opposed punitive tariffs.
At the same time, President Trump may need to determine how he can deliver on Saudi demands for U.S. production cuts, lacking any direct ability to influence American producers. The two likeliest options would be a voluntary decision of the Railroad Commission of Texas, which regulates the state's oil and gas industry, or a shutdown of Gulf of Mexico platforms and their 1.8 million barrels daily, using the threat of coronavirus to their workers as the reasoning.
The uncomfortable fact for President Trump is that despite his long-standing criticism of OPEC and his support for free energy markets, he needs the cartel's market intervention to keep shale producers afloat.
President Trump doesn't have good options. He lacks easy leverage over the players, domestic and international, and he's got even less control over the COVID economic hit.
In the end, it is more likely that a US government bailout will save the industry, rather than a global market intervention.
Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States' most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper's European edition. His latest book – "Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth" – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week's top stories and trends.
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