Will OPEC Listen to Trump to Raise Oil Output?

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627 - Will OPEC Listen to Trump to Raise Oil Output?

The White House has asked Saudi Arabia and some other OPEC producers to increase oil production under the table, but did not determine a specific number, according to three OPEC and industry sources on June 5. The sources pointed out that the request to improve oil output was made unofficial from Washington to each of the oil producers rather than to the Organization of the Petroleum Exporting Countries as a group.

The rare move came after U.S. oil price rose to their highest in three and a half years, and President Trump attacked OPEC for price fixing policies on Twitter saying that retail gasoline prices were “artificially very high” and “will not be accepted”. It also follows the U.S. withdrawal from Iran nuclear deal and the government decision to reimpose sanctions on Iran’s oil exports which will come into force later this year. It is noteworthy that Iran could produce about 1 million barrels a day, or more than 1 percent of global production.

Oil prices continued to climb up for most of May, since U.S. sanctions on Iran could lead to potential loss of its crude exports and Venezuelan oil output is descending. To ease the supply concerns and rising oil prices, OPEC’s largest producer Saudi Arabia and its primary non-OPEC partner in the production cut deal, Russia, were discussing to enhance the integrated oil output from the pact by approximately 1 million barrels per day (bpd).

Also Read: What You Need to Know About Trump’s Iran Decision

However, is OPEC really going to increase oil production? In effect, OPEC also bears risks if it decides to do so.

First of all, the macroeconomic environment is unable to stay development. The most recent data from the global manufacturing PMI by IHS Markit shows that global manufacturing growth eased to a nine-month low in May, largely indicating a declining of world trade flows to the weakest for more than one-and-a-half years.

Meanwhile, the Wall Street Journal states that investor confidence in the Eurozone is at a multi-year low. The dimming market optimism mirrors the trade war that has broken out between the U.S. and the EU, as well as political unrest in Italy that has put the common currency back into the public view.

All above have created a tricky environment for OPEC. If it maintains the production cuts, oil prices would go up too high. High oil prices would cause economic slowdown inevitably, and OPEC is the one who is indirectly causing an economic downturn, which would make the current situation worse, dragging oil prices back down.

On the other hand, if OPEC increases oil production as the world expects, the result could be a much bigger drop in oil prices than the cartel wants, because the global economy is softening anyway. Extra oil production from OPEC at this time could possibly lower prices and in turn mitigate the negative fallout of a cyclical downturn. But the market is also demanding less of oil at this phase. Thus it is still unclear how OPEC and Russia would plan for future oil production in their meeting in Vienna on June 22. Are they really going to raise oil production by 1 million bpd as discussed?

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