- Oil prices have fallen to approximately $50 a barrel, which is a 30% loss from the highs.
- President Trump wants Saudi Arabia to implement regulations to cheapen the cost of crude oil even more.
- U.S. crude prices are reaching prices that could hurt a significant portion of Trump’s supporters, American oil and gas drillers.
Last week marked record low oil prices over the last 2 months, and President Trump wants these prices to plunge even further. However, the U.S. oil and gas workers, who represent a significant pillar of Trump supporters, aren’t as happy with this.
The recent oil price rally has quickly diminished as fears of possible shortages could show that crude supply will be much greater than demand next year. This sell-off is pushing U.S crude oil prices to the point that would negatively impact drillers’ budgets and their abilities to provide a positive return to shareholders.
Last Sunday, the president was ecstatic with the large crude oil drop off and its impact on the economy. Mr. Trump believed that the Federal Reserve should be aware of this.
“It’s so nice that oil prices are falling (thank you Mr. President). This is like a large tax cut, to more positive economic news. Inflation is down, but please pay attention Fed Reserve!”
WTI Crude Oil Down Over 13% YTD in 2018
“Larger companies like Exxon, Chevron, BP will survive the price cuts due to their size, but this would wreak havoc for smaller companies,” said Andrew Lipow, president of Lipow Oil Associates.
Low oil prices below $55 earlier this week weren’t sufficient for Trump. Last Wednesday, President Trump tweeted praise to Saudi Arabia for hiking output and allowing capped oil prices. Trump encouraged this nation to keep going by saying “let’s go lower!”
“Oil prices going even lower. Wonderful! Similar to a large tax cut for America and the rest of the world. Enjoy as $54, was just $82 thanks to Saudi Arabia. Keep at it!”
Trump sent encouraging tweets a day after he declared support for Saudi Arabia. This was despite petitions to punish this nation after Saudi officials murdered journalist and U.S. resident Jamal Khashoggi last month. The CIA supposedly reached the conclusion that Saudi Crown Prince Mohammed bin Salman ordered the killing. However, Trump doubts this conclusion.
Trump’s defense of Saudi Arabia comes roughly two weeks prior to a critical OPEC meeting on Dec. 6. The President wants the Saudi group to keep maintaining its actions, which would cap oil prices.
In last few weeks, the OPEC cartel, which is composed of 15 nations along with other major exporters, have mentioned to possibly agreeing to a price boosting output cut. Despite this, Mr. Trump’s overtures to Saudi Arabia could make it harder for the nation to support cutting back oil production.
“It seems that they will back off on that,” John Kilduff, founding partner at energy hedge fund Again Capital, told CNBC’s “Squawk Box” on Wednesday. ” It appears that our current relationship is bought and paid for now with the oil market’s MVP, President Trump, capping lids on prices.”
Low Oil Prices Double-Edged Sword For U.S. Economy
By decreasing oil prices, President Trump wants to make the average American richer via savings at the gas stations. The national average for a gallon of regular gasoline has fallen to $2.58, which represents a fall of more than 25 cents.
Through pressuring Saudi Arabia, The US President wants to put a financial strain on energy companies that have pushed U.S. productions to record highs, an accomplishment he brags about. This administration has created a wide range of energy and environmental regulations, which have promoted U.S. exports to become a dominant force in the global energy market.
“I think it’s a very interesting what is occurring in the White House, one side wants to help the U.S. consumer with lower oil prices, while the other doesn’t realize the negative impact this will have on the US shale industry.,” Helima Croft, global head of commodity strategy told RBC Capital Markets, told CNBC’s “Squawk on the Street” on Wednesday.
This industry is still recovering from the downturn of 2014-2016, which demanded that drillers to cut costs and increase efficient. These “frackers” use an expensive procedure called hydraulic fracturing to free oil and gas from shale rock formations.
U.S. Shale Industry Expected To Be Hit Hard By Oil Decline
Most frackers would break even on new wells with prices below $50 a barrel. With the U.S. WTI crude falling towards $50 on Friday, this buffer zone is shrinking.
The Permian basin, located between Texas and New Mexico is the nation’s most important shale oil field. Here companies need oil prices to be between the upper-$40s to lower-$50s to break even on the costs of developing new oil fields, per to Muhammed Ghulam, senior research associate at Raymond James.
A majority of the Permian production is priced off the Midland benchmark, which trades at a discount to WTI. Thus, prices are hovering in the mid-$40s.
“We have reached a level that we’re nearing full break even levels for Permain producers and if this lasts long, we could see an impact on capex budgets over the next few months,” said Ghulam.
Therefore, drillers will state more conservative guidelines for 2019 budgets. Most companies won’t cut dividends, but these weak oil prices could determine whether some drillers would restore share buyback programs or increase shareholder payouts.
OPEC’s important role in balancing the oil market is a source of disagreement between President Trump and his energy supporters. Most American drillers support the OPEC alliance’s decision in January 2017 to cut output to drain excessive crude and increase prices.
Continental Resources CEO: OPEC Was in the Right and is a Responsible Organization
Continental Resources CEO Harold Hamm, an energy consultant to Trump, said OPEC “did the right thing” and “acted very responsibly” by extending the production curbs into 2018 during an end of the year meeting in 2017.
Ultimately, Croft thinks Saudi Arabia will act in its best interest by supporting producing cuts when the group meets on Dec. 6.
“I think it will be interesting to see the impact after that OPEC meeting. If they pull those barrels, how will the President react?” she mentioned.
What are your thoughts on OPEC, Trump and Oil Prices? Please share below!
Article By: Dalton Brewster