SEE­ING EYE-TO-EYE ON THE PRICE OF CRUDE

National Post (Latest Edition) - - FINANCIAL POST - Clif­ford Krauss in Hous­ton The New York Times

It is un­usual for the United States, Saudi Ara­bia and Rus­sia to see eye-to-eye, much less try to achieve com­mon en­ergy-pol­icy goals, even in­di­rectly.

But that is what seems to be hap­pen­ing, and it is tak­ing the edge off the year-long rise in oil and gaso­line prices. Even if those coun­tries have their own rea­sons for wel­com­ing the surge in pro­duc­tion, it is also re­duc­ing the in­flu­ence of the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries, which will meet in Vi­enna next week to dis­cuss pro­duc­tion cuts put in place in early 2017.

The cheer­leader, if not ring­mas­ter, in this ef­fort is Pres­i­dent Don­ald Trump, who took to Twit­ter on Wednesday to crit­i­cize OPEC for high crude prices. “Oil prices are too high, OPEC is at it again,” he wrote in his sec­ond such state­ment since April. “Not good.”

What­ever hap­pens at the OPEC meet­ing, two of the big­gest play­ers in the global oil mar­ket — Saudi Ara­bia and Rus­sia — ap­pear to have al­ready cal­cu­lated that it is in their im­me­di­ate in­ter­est to crank up pro­duc­tion, ef­fec­tively sidelin­ing the Saudis’ fel­low car­tel mem­bers.

Be­tween them, the two coun­tries have each added more than 100,000 bar­rels a day to global oil sup­plies. Trump wants even more crude slosh­ing around the mar­ket to tamp down en­ergy prices be­fore the con­gres­sional elec­tions in Novem­ber, and it looks like he may get it.

It is per­fectly nor­mal for Repub­li­can and Demo­cratic ad­min­is­tra­tions to try to nudge oil prices down, but rarely — if ever — has the ef­fort been so blunt and pub­lic. For decades, when­ever pres­i­dents faced ris­ing gaso­line prices, U.S. of­fi­cials pri­vately called Saudi Ara­bia seek­ing help in get­ting OPEC to boost pro­duc­tion — some­thing that the Trump ad­min­is­tra­tion has done, as well.

But Trump ap­pears un­sat­is­fied with lim­it­ing his over­tures to pri­vate diplo­macy. He is pub­licly tar­get­ing OPEC even though oil prices have sta­bi­lized since his crit­i­cism in April, and reg­u­lar gaso­line prices have slid by roughly a nickel a gal­lon since Memo­rial Day. A bar­rel of oil in the U.S. now costs about US$67, down nearly US$4 over the past month, al­though that is still about 45-per­cent higher than at this time last year.

Saudi oil of­fi­cials have agreed to boost pro­duc­tion pub­licly, in co-or­di­na­tion with Rus­sian of­fi­cials who would like to ex­port more oil to bol­ster the coun­try’s econ­omy. That may well up­set Iran, Venezuela and other OPEC mem­bers that want higher oil prices, mak­ing the com­ing meet­ing a con­tentious one.

Pres­i­dent Vladimir Putin of Rus­sia and Saudi Ara­bia’s Crown Prince Mo­hammed bin Sal­man will dis­cuss oil and other is­sues Thursday as their teams face off in the World Cup. The stars ap­pear to be aligned for them to work to­gether to keep oil prices from climb­ing too high, too fast, de­spite the col­lapse of Venezue­lan pro­duc­tion and the ex­pec­ta­tion new U.S. sanc­tions will tar­get Ira­nian oil ex­ports.

“There’s a com­mon­al­ity of in­ter­est that for­tu­nately and co­in­ci­den­tally came to­gether,” said Larry Gold­stein, a di­rec­tor of the En­ergy Pol­icy Re­search Foun­da­tion. “Putin is un­der pres­sure do­mes­ti­cally to ex­port more oil, the Saudis got a lit­tle ner­vous when the Brent price hit US$80 a bar­rel, and the U.S. is ner­vous about their Ira­nian pol­icy and the pos­si­bil­ity of soar­ing gaso­line prices.”

The re­sult has been a par­tial re­ver­sal in en­ergy prices, which should cheer elected lead­ers and econ­o­mists who worry that high en­ergy prices could hurt global eco­nomic growth.

But what­ever the ad­van­tages for con­sumers and U.S. for­eign pol­icy, oil price re­lief could be mod­est and short-lived.

Trump, for in­stance, is pur­su­ing sev­eral pol­icy goals that cut against each other. He wants lower gaso­line prices to keep the econ­omy hum­ming. At the same time, he wants to squeeze Iran and Venezuela with sanc­tions, which would in­evitably lower the amount of oil on the world mar­ket. Venezuela’s oil ex­ports are fall­ing by tens of thou­sands of bar­rels ev­ery month, and Ira­nian ex­ports could fall by be­tween 200,000 and 1 mil­lion bar­rels a day by next year, an­a­lysts say.

A boom in oil pro­duc­tion in the U.S. has helped in­crease global sup­plies even as OPEC coun­tries cut back to raise prices. But ex­perts be­lieve a short­age of pipe­lines will limit the amount of oil firms can ex­tract from the Per­mian basin of Texas and New Mex­ico, the main sources of new U.S. pro­duc­tion, un­til late 2019.

Scott D. Sh­effield, chair­man of Pi­o­neer Nat­u­ral Re­sources, a ma­jor Texas oil pro­ducer, said if there were a sig­nif­i­cant decline in Venezue­lan and Ira­nian ex­ports, “and Saudi doesn’t in­crease out­put, we’re go­ing to see US$100 oil by the end of the year.”

Just a few years ago, US$100 a bar­rel was con­sid­ered nor­mal. But prices col­lapsed in 2014, fall­ing in the U.S. to below US$30 in early 2016, as a glut of oil filled up tankers. Now the world’s big oil pro­duc­ers are seek­ing a sweet spot for oil prices.

U.S. and global oil prices rose mod­estly Wednesday de­spite Trump’s crit­i­cism.

Even as he has crit­i­cized OPEC, Trump has found a will­ing ally in Saudi Ara­bia. Riyadh has long ar­gued against the Iran nu­clear deal, and pressed the U.S. to put more pres­sure on the Shi­ite Is­lamic regime. The Saudis are fight­ing Houthi rebels backed by Iran in Ye­men and have been try­ing to counter Ira­nian in­flu­ence in Syria and else­where.

Iran would like higher oil prices, be­cause it needs money to in­vest in its weak­ened oil in­dus­try and ail­ing econ­omy. But its ex­ports could fal­ter with the re­turn of sanc­tions that had been re­moved un­der the nu­clear deal. And other OPEC mem­bers will seek to take ad­van­tage of Iran’s mis­for­tune by sell­ing more oil to big mar­kets like China and In­dia.

“If you are the Saudis, you want to do Trump a favour and get him off your back,” said Robert McNally of Rap­i­dan En­ergy Group.

Sadad Ibrahim Al Hus­seini, a for­mer ex­ec­u­tive vice-pres­i­dent of the Saudi Ara­bian Oil Co., said Rus­sian and Saudi Ara­bian lead­ers “will look at grad­ual but steady in­creases of over­all sup­ply, eas­ily be­tween one and 1.2 mil­lion bar­rels a day by year-end.”

The two coun­tries will prob­a­bly lobby other oil-pro­duc­ing na­tions to also raise out­put, par­tic­u­larly Kuwait and United Arab Emi­rates, both OPEC mem­bers.

Be­sides juic­ing eco­nomic growth, Rus­sia has other rea­sons to ex­port more oil. Rus­sian oil firms, in­creas­ingly ac­tive in Venezuela and the Mid­dle East, have re­cently raised their pro­duc­tion ca­pac­ity. They also pre­fer lower prices be­cause they pay higher cor­po­rate tax when prices go above US$75 a bar­rel.

“Rus­sian firms have long been push­ing to pro­duce more,” said Ja­son Bord­off at Columbia Uni­ver­sity. “They have in­vested heav­ily in new pro­duc­tion ca­pac­ity and see far more up­side from ad­di­tional pro­duc­tion rather than higher prices.”

YURI KADOBNOV / POOL PHOTO VIA THE AS­SO­CI­ATED PRESS

Rus­sian Pres­i­dent Vladimir Putin, cen­tre, shakes hands with Saudi Ara­bia Crown Prince Mo­hammed bin Sal­man dur­ing their meet­ing Thursday in Moscow where oil pol­icy would have been a ma­jor topic of con­ver­sa­tion.

DON EMMERT / AFP / GETTY IM­AGES

U.S. Pres­i­dent Don­ald Trump wants more crude slosh­ing around the mar­ket to tamp down en­ergy prices be­fore the con­gres­sional elec­tions in Novem­ber, and it looks like he may get it.

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