On the Oil market, how far does the convergence of interests between OPEC+ and Trump go?

By accelerating the fall in oil prices, the timing between OPEC+’s decision to accelerate quota easing, and the Trump administration’s announcement of the start of a tariff war could limit inflationary pressures for US consumers and put pressure on the cartel’s undisciplined members. However, the convergence of interests between the heavyweights of the oil market is likely to be short-lived. This policy is likely to make the economic equation increasingly difficult for US producers. At the same time, by putting pressure on public finances, it poses a risk to the cohesion of the cartel.

The timing between OPEC+’s decision on 3 April to accelerate the easing of its oil production quotas and the Trump administration’s announcement on 2 April that it would launch a global tariff war is no coincidence. With the oil market in a state of oversupply, there was no good time for OPEC+ to re-enter the market. Synchronising with the US decision allows the cartel to benefit from a knock-on effect and to boost the effectiveness of its decision. So how long will the convergence of interests between the two heavyweights of the global oil market last?

Objective allies in the short-term

For the Trump administration, the fall in oil prices to around USD 60/ barrel provides clear short-term political benefits. This fall could at least partially offset the inflationary pressures linked to the higher cost of imports for US consumers. Although there are several objectives behind OPEC+’s decision to accelerate the ease in quotas, the pressure exerted on the cartel’s non-compliant members (mainly Kazakhstan and Iraq) is one of the main objectives. The cartel, led by Saudi Arabia, hopes to force both these countries to reduce their production by putting pressure on prices.

Running the risk of rapidly rendering the drill, baby, drill agenda obsolete

This policy, which aims to influence prices, entails significant risks for both players. The most obvious affects the US oil industry and results in Trump’s «drill, baby, drill» agenda being rendered obsolete. Indeed, US shale oil producers are being doubly affected by the consequences of the trade war. On the one hand, the prospect of a slowdown in global oil demand is leading to a downward revision of oil price forecasts for the next two years. It is the Asian economies (excluding China) that drive global demand for oil, and they could be the most affected by the increase in US customs duties. At the current price (USD 60-65/barrel Brent benchmark), we are certainly far from the breakeven point for US producers. According to the Federal Reserve Bank of Dallas, the price is just over USD 40 per barrel (the WTI benchmark is a few dollars lower than Brent). Nevertheless, shale oil production requires a continuous flow of investment to maintain production (proportionately more than conventional oil) and, according to the same source, the breakeven price for investment in new wells is around 65 USD/barrel. Furthermore, although a large proportion of the oil industry’s investment goods are produced locally, it needs steel, imports of which are currently taxed at 25%. This dual impact - slowing demand and rising investment costs - could bring a halt to the development of US production, at least in the short term.

Uncertain effectiveness of cartel policy

As far as OPEC+ is concerned, the situation is more complex. To understand the sensitivity of non-compliant producers to falling barrel prices, we need to look at budget dynamics. Despite the very high Kazakhstan’s fiscal breakeven (over USD 100/barrel, according to the IMF), its vulnerability to a fall in prices needs to be put into perspective. This high breakeven price is due to the relatively low share of oil revenues in total budget revenues and to a low « oil-rent rate » (the share of total oil export revenues that actually returns to the budget in the form of royalties, dividends and more). In addition, budget deficits are contained (a few percent of GDP in recent years) and easily financed by withdrawals from the sovereign wealth fund. On the Iraqi side, the situation is complex and visibility is poor. Contradictory dynamics are at play between the central government’s willingness to maximise its main source of revenue, the uncertain recovery in oil exports from the Kurdish region and the US policy of sanctions against Iran, which could affect Iraq’s oil sector. Iraq’s fiscal sensitivity to falling prices is therefore uncertain.

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