Silence is, usually, golden. But from a president who usually tweets too much, it's more puzzling than golden.
For investors holding long positions in crude on bets that Iranian tensions would continue supporting Brent at above $65, Donald Trump’s reticence over Tehran's willingness for talks to resolve the sanctions crisis can even be worrying.
This is because any oil bull worth that name knows exactly how Trump feels about high oil prices.
Trump Wants Cheaper Oil If He Can Help It
The U.S. president spent a good part of last year tweeting against OPEC’s production cuts as the cartel worked at throttling supply and jacking up prices. While Trump's done little of that this year—for good reason too, given that counteracting factors such as the trade war with China and other demand worries have torpedoed any oil rally before it got too big—there’s no doubt he wants cheaper crude if he can help it.
Trump’s motivation for more affordable oil is barely a secret: History has proven that high oil prices are never too good for a president seeking reelection, and Trump is 16 months away from a hopeful second term.
Reuters energy analyst John Kemp noted in a column earlier this month that the rise in benchmark U.S. crude prices from a low of less than $30 a barrel in February 2016 to more than $70 in July 2018 has boosted the economies of Texas, Oklahoma, North Dakota and other producing states.
Said Kemp:
"But most of those states are solidly Republican and likely to vote Trump’s party at the mid-term congressional elections in 2018. The president, therefore, is paying much closer attention to the harmful impact of higher oil and gasoline prices on consumers in swing states."
From the perspective of the White House, the ideal price would not be so low as to cause problems for producing states but also not so high as to hurt consuming states.
Trump told Fox News in an interview two weeks ago that he wasn't satisfied with both current oil prices and the production from OPEC—which, incidentally, has extended until March 2020 its commitment to cut regular output by 1.2 million barrels per day.
...And He Wants OPEC To Pump Another 2 Mln Barrels Per Day
Asked what the cartel should be pumping, the president replied without hesitation: “They have to put out another 2 million barrels, in my opinion."
Three days later, he tweeted:
“Gas prices are up & they are doing little to help. This must be a two-way street. REDUCE PRICING NOW!”
There's little doubt whom the president is referring to whenever he uses the collective "they" together with OPEC: Saudi Arabia.
As the de facto head of the cartel, the Middle Eastern country needs to assure both the price and security of the oil they produce and ship. This is particularly important now, when an increasingly belligerent Iran is trying to hurt the rest of OPEC, which has been enjoying this year's price rebound while Tehran was being shut out of the market by U.S. sanctions.
Trump made the link between Iran sanctions and Saudi production policy explicit in the Fox interview.
The U.S. will counter the influence of Iran, Saudi Arabia’s major regional rival, by imposing tough sanctions and providing security for Arab Gulf countries through the presence of U.S. military forces. In return, Saudi Arabia will protect U.S. motorists against an increase in gasoline prices.
Which brings us to the interesting twist presented now by Iran's will to negotiate with the Trump administration after a year of hostilities and grandstanding by both countries that climaxed with June's downing of a U.S. surveillance drone by the Islamic Republic.
Iranian Foreign Minister Mohammad Javad Zarif said on Monday his country wanted talks and not war with the U.S. But Zarif repeated the precondition set at the weekend by his boss, President Hassan Rouhani, for negotiations to begin: All U.S. sanctions on Tehran must end first.
Iran Can Provide That Additional 2 Mln Bpd
Logic compels Trump to agree to a sit-down with the Iranians because that additional 2 million bpd he's seeking from OPEC is right there with Tehran. After the signing of its original 2015 nuclear accord with the Obama administration and other world powers, Tehran produced up to 2.5 million bpd at its peak.
In fact, even before the Iranians offered him the peace pipe this weekend, Trump had been inviting them to the table, with a near identical refrain: No war, just diplomacy.
Talks with Iran would instantly achieve two of Trump's immediate objectives: Lower oil prices and a chance to reset yet another Obama-era "mistake".
Flat Price Of Oil Can Fall $5 Per Barrel Or More Once Talks Are Announced
The moment Trump reciprocates Tehran's call, expect the flat price of oil to fall by $5 per barrel or more, and every rebound thereafter to be checked by the possibility of an impending Iran Nuclear Accord 2.0.
Eventually, the president can gloat on how the "Trump Iran deal" is the better one for the world, versus Obama's original 2015 accord, which he had labeled as the "worst deal ever".
Agreeing To Iran Precondition May Be Perceived As Weakness
But by agreeing to Rouhani's precondition to the talks, Trump will also be playing into the Iranians' hands in giving them exactly what they want—to export their oil right away and worry later about the politics and compliance set by the U.S.
It could be perceived as a sign of weakness on Trump's part and is certain to infuriate hardliners in his administration bent on making things even harder for the Islamic Republic. And walking out on talks later—if they don't work—and reimposing sanctions might only dilute Trump's original tough resolve with the Iranians.
Already, U.S. Secretary of State Mike Pompeo has made clear he isn't happy at all about Rouhani's precondition, although he concedes that Trump "would make the decision".
As the world awaits Trump's tweet or response, we're of the opinion he'll do what's right for his political campaign rather than the world.