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Trump's oil plea to Saudi Arabia

01/07/2018

Following from Thursday’s commentary on the Oil price, it is interesting to note that President Trump has asked the Saudis to raise output to meet demand and drive down the price. If this tells us nothing else it confirms that Saudi Arabia is the go-to swing producer for oil. While the Saudis have appeared to accede to this request it is worth remembering that the rationale for this action does not actually have its origins in Economics, but in Politics. The US wants to hammer an economic point home to Iran, and the decline in oil prices that a production increase of 2m bpd, (a figure suggested by Trump, although noticeably not endorsed by the Saudis), would certainly hurt them. However, it hurts other oil-producing nations too, notably Russia, where the cost of extraction has fallen from around US$100/bbl down to nearer $70, and therefore at the current levels they have at last managed to get their heads above the water. There are 2 questions to be answered. Firstly, if the Saudis play ball, how quickly can they step up production ? Secondly, if they don’t have cash flow problems does it make economic sense to sell their sole (and irreplaceable) asset in larger quantities at cheaper prices to cultivate their relationship with the US ?

The answer will become known in time, but the market reaction is not likely to be so slow-moving. There will be some liquidation of Longs, but there can be no imminent collapse in the oil price, and we continue to buy dips.

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