Will Donald Trump Become an Oil Market ‘Bull’ or ‘Bear?’

It is in the interest of the U.S. president to stabilize oil prices and stop the oil price war with Saudi Arabia. However, his intention to punish China for causing the COVID-19 pandemic may interfere with stabilizing the demand for oil.

On April 29, oil futures investors reacted positively to the good news about the new OPEC+ deal, a COVID-19 vaccine in the United States and Great Britain, and the first signs of recovering economic activity in some European and Asian countries. Stock market players began to adjust their positions in the oil paper markets for June and July after the historic crash in oil benchmark prices to below zero on April 20. However, the oil futures market plunged after Donald Trump announced his plan to demand reparations from China for COVID-19. The same day, Trump threatened to remove U.S. troops from Saudi Arabia if Crown Prince Mohammed bin Salman did not negotiate cutting oil production by 10 million barrels with Russian President Vladimir Putin. If the White House decides to do this, it will leave Saudi Arabia to deal with Iran by itself.

By the beginning of May, oil markets and stock players faced two major risks. First, a major conflict between the United States and China could affect the oil demand in the Chinese economy. Second, instability in the Middle East, which was partially caused by U.S. actions, might critically interfere with oil supplies from the Gulf States, which would cause a decrease in supply. Trump’s strategy will either leave the market in “bear” territory or facilitate a “bull” oil market growth.

Saving Shale Oil

In April, there were vigorous discussions in the United States over options for pressuring Saudi Arabia during the ongoing price war and efforts to save U.S. shale oil companies. The proposed arguments concerned U.S. foreign policy and domestic political leverage capabilities. Some suggested that Trump should urgently approve money to bail out the shale oil industry and push for reducing oil production in states such as Texas and Oklahoma. At the same time, some members of the Republican Party argued for taking radical steps against Saudi Arabia – from imposing import tariffs to seizing all military assistance to America’s Middle East partner.

On May 4, it became clear that administrative regulation of oil production at state levels was not necessary. Texas Railroad Commissioner Ryan Sitton was unable to win support for the plan to cut oil production by one barrel per day because there was no quorum. This plan would have affected all oil production companies; it appears that large corporations like Exxon Mobil and Occidental Petroleum were the real reason why the plan did not go through. Oil industry giants have also advocated against direct financial support of smaller shale oil companies that could help them survive the crisis. Major oil companies are interested in buying out the assets of smaller companies at a low price and in balancing the market together with the Russian and Saudi companies. For large corporations, smaller companies always get in the way of orchestrated efforts and create unnecessary market volatility.

It is important to keep in mind that the unpredictability of the shale oil industry caused dissatisfaction within large financial businesses as well. A few investment funds that manage assets worth trillions of dollars, such as Black Rock, asserted that it would be essential to shift from traditional energy projects to financing renewable energy companies.

For the U.S. government, choosing to subsidize shale oil companies over other struggling businesses amid soaring unemployment seems problematic from a political point of view. In the current situation, the United States will have to deal with Saudi Arabia by using foreign policy tools.

The Middle East Dilemma

A flotilla of 28 Saudi tankers carrying 43 million barrels of oil is set to arrive on United States shores before May 24. This oil fleet will join a line of 76 tankers now waiting to unload in U.S. ports. At the same time, Trump is unlikely to impose tariffs on oil imports, because it might hurt oil refineries geared to process Saudi oil as well as hurting transportation companies. Trump already threatened the U.S. military assistance to Riyadh as a bargaining chip back in March when he was pushing for the new OPEC+ deal. Furthermore, maneuvers by the White House are constrained by contracts with Saudi Arabia worth billions.

The U.S. president has another strategic option that he implemented in the summer of 2019 and could use again: the escalation of conflict with Tehran. Last year, it almost paralyzed oil exports from the Gulf States. Two or three months of military confrontation between the U.S. and its allies on one side, and Tehran on the other, could cause oil prices to soar radically. However, if this confrontation takes place, it is important to win before the concluding phase of the presidential election campaign. A full-scale, protracted conflict with Iran is dangerous for Trump, especially in combination with the strained relationship with China.

The Chinese Front

Over the next few months before the elections, Trump probably will use aggressive rhetoric against China as a political tool. For example, he might blame Joe Biden for representing the Chinese lobby within the U.S. political establishment. At the same time, the president will likely focus on exacerbating the tariff war and expanding the scope of economic sanctions against China. Any harsher measures will entail bigger risks. The Republican president’s call to sue China in the U.S. courts will not produce any significant legal outcome, nor will suggestions that U.S. deny its debt obligations to China. Trump has already rejected the latter idea because it would sabotage the status of the U.S. dollar as one of the bases of the world financial system.

On May 4, Treasury Secretary Steven Mnuchin announced plans to increase borrowing by $3 trillion. Due to the pandemic, it is unlikely that China is going to purchase the same amount of U.S. debt as before. At the same time, one cannot rule out the possibility that China will step away from the dollar and introduce its cryptocurrency to eliminate foreign policy risks.

In this scenario, Russia will have an opportunity to benefit. China might want to hedge its bets and increase its imports of hydrocarbons from Russia due to the unstable situation in the Persian Gulf. The fact that pipeline oil supplies cannot be affected by navigational risks or military escalation will work to Russia’s advantage.