LONDON (Reuters Breakingviews) - Donald Trump is calling in a favour. In November, the American president publicly exonerated Mohammed bin Salman, Saudi Arabia’s crown prince, over his alleged role in the murder of journalist Jamal Khashoggi by Saudi agents. Five months on, Trump’s quid pro quo for MbS - to help him mitigate the effect on oil prices of stymieing Iran via tough sanctions – looks clear-cut.
In the last six months, eight countries including China and India have been allowed to keep importing some of Iran’s 2.7 million barrels a day of crude. That has kept Iranian exports at around 1 million barrels per day, from twice as much a year ago. On Monday, Secretary of State Mike Pompeo said this waiver period will not be extended.
If this oil stops flowing, Trump will have complicated his own task of keeping a lid on gas prices as he prepares for 2020 presidential elections. Unlike last autumn, the oil market is no longer hugely oversupplied. Saudi, its Organization of the Petroleum Exporting Countries peers and allies like Russia have cut production by appreciably more than an agreed 1.2 million barrels per day target, according to the International Energy Agency. And Libyan and Venezuelan output is also troubled. Stocks of oil in developed economies are now below their five-year average by at least one widely-followed measure.
That’s where MbS’s chit comes in. At 9.8 million barrels a day, Saudi production is over 2 million barrels a day lower than its theoretical maximum output, the IEA reckons. Yet ramping up production could mean lower crude prices, which would make it harder for Riyadh to balance its budget. Too obviously following Trump’s lead will also annoy Saudi’s OPEC peers, who are nearer their output capacities. Smaller members already grumble that policy doesn’t suit them.
Saudi might yet avoid having to ramp up production if economic growth slows and oil demand slumps, or if China and India ignore the U.S. edict and keep importing from Iran. But neither is guaranteed. And if MbS thinks back to last year, he will recall the Trump administration’s decision to grant waivers was also an about-face which sent prices crashing at year-end. Thanks to the Khashoggi affair, Saudi isn’t really in a position to stand up to Uncle Sam’s capriciousness on the oil front.
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