Editor's Letter: Production cuts are bad news for Trump, good news for shale producers

Trump might not like it, but OPEC+ production cuts, and relatively higher oil prices, are good news for US shale producers

US President Donald Trump has been vocal about oil prices and OPEC this year.
(Photo: Gage Skidmore)
US President Donald Trump has been vocal about oil prices and OPEC this year.

It has been an interesting if slightly unpredictable year for the oil market; oil prices rose above $80 per barrel, and fell below $60 per barrel. OPEC output was boosted, and then cut. Geopolitical tensions rose, and then dissipated.

US President Donald Trump, for his part, has certainly been a key factor in the oil market this year, even if he will not take credit for it.

When the US announced the reinstatement of sanctions against Iran, taking a hard-line stance that it would not offer any exemptions, speculation about a supply shortage hit the market and helped push prices to four-year highs in October.

Trump blamed OPEC for the price hike, using his favourite tool: Twitter. In June, OPEC agreed to boost production to fill a potential supply gap. But when the Trump administration issued eight waivers surrounding sanctions, and its shale production started to ramp up, oil markets were starting to look oversupplied, and oil prices dropped.

Trump took to Twitter to express his joy, calling the price drop a “big tax cut for America and the world,” and thanking Saudi Arabia while asking it to “go lower” on oil prices. It is uncharacteristically humble of Trump—whether or not his actions this year were strategically placed to force a drop in prices before November midterm elections, he certainly holds some of the responsibility for the recent drop in oil prices.

But how low does he want prices to go? In 2013, he tweeted that “oil should not cost more than $40 a barrel. Ideally it should be $25,” citing that it is “cheap to produce.”

Despite the fact that the Trump administration’s domestic regulations have promoted the country’s energy industry, and Trump frequently boasts about US output levels, extremely low oil prices would hurt shale producers, a pillar of his support base. US shale production revolutionised the oil market precisely because operators could extract hydrocarbons at a low cost, breaking even at crude prices of around $50 per barrel in the Permian Basin.

Analysts say prices close to $45 per barrel would put a strain on US producers. With WTI crude (the US benchmark) at $51 per barrel, as of writing, that doesn’t leave producers with much of a margin.

Prices at the gas pump are a key issue for US voters, but with US production at a record 11.7mn bpd, it will be interesting to see how his administration balances the needs of shale producers with those of other voters looking for a discount at the pump.

US crude production is expected to average more than 12mn bpd in 2019, according to the Energy Information Administration. With growing production, the US could eventually shift from net importer to net exporter.

We might someday see the US among OPEC’s ranks, and then, perhaps, the tweets will be much sweeter.


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Oil & Gas Middle East - May 2020

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