Oil in Global Economy Series: Saudi Arabia would comply with Trump’s demand of increased production

President Trump has been demanding that the United States’ closest ally in the Middle East, Saudi Arabia pump up more crude oil to ease pressure on rising price.

Price rise background:

Despite OPEC announcing that it would increase production at its June meeting, the financial speculators have been pushing prices of crude benchmarks higher around the world as the exact amount committed has remained vague.

Based on OPEC’s statement, we at FxWirePro calculated the amount to be somewhere between 500,000 barrels per day (bpd) to 600,000 bpd. However, that didn’t seem satisfactory as the focus turned to political unrest amid declining production in Libya, Venezuela, and Nigeria. In addition to that, the looming U.S. sanctions on Iran, which according to Trump will be harshest ever has kept the markets at an edge.

While the price of the global benchmark Brent crude has risen by 7.5 percent to $77.9 bpd since the mid-June bottom, the price of the North American benchmark WTI has risen by 16 percent and currently at $73.8 per barrel.

Trump’s demand:

There have been reports all over the financial media that president Trump is demanding that Saudi Arabia increase production by 2 million barrels per day. President Trump himself tweeted on June 30th, “Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference...Prices to high! He has agreed!

It seems to be an agreement that Saudi Arabia would control the flow of crude to maintain the price at the current level or a bit lower around $70 per barrel area.

Saudi Arabia would comply:

Firstly, President Trump has shown with North Korea that his type of pressure campaign amid diplomatic efforts have worked or at least so far working, hence it is in the interest of Saudi Arabia to keep a check on Iran by going it Trump’s way. Keeping oil price around $70 per barrel serves both economic and political purpose.

Secondly, a higher production by Saudi Arabia not necessarily would translate into higher global production since it is already declining in Libya, Nigeria, and Venezuela amid expectations that exports from Iran would decline, once the sanctions set in. That is likely to help Saudi Arabia in deciding to follow Trump’s lead.

And finally, as a matter of fact, Saudi Arabia has already loosened the tap. In June Saudi Arabia produced crude about 10.7 million barrels per day, which is more than 700,000 barrels more than a month ago.