An impromptu agreement between the United States and Saudi Arabia to add more supply to increasingly tight oil markets is perceived as a test of the kingdom’s ability to pump more crude — and could further antagonize Iran and Venezuela, as both countries grapple with deteriorating conditions in their respective economies.
Barely a week after OPEC‘s decision to ramp up oil supplies, President Donald Trump surprised the world on Saturday by announcing a new side agreement with the Saudis to smooth over supply shortages from crisis-hit producers, Iran and Venezuela. Both countries resisted the oil cartel’s decision last month’s agreement, even though OPEC demurred on how much it would boost supply.
The president and King Salman agreed that Saudi Arabia would add more output to a market that’s seen crude shoot to its highest level in more than 3 years above $74 per barrel.
According to Trump, the world’s largest oil producer will inject up to 2 million barrels a day to world oil markets — a figure Saudi officials did not immediately verify in a readout confirming the call between Trump and Salman.
Gas prices have risen in tandem with crude, ramping up political pressure on Trump as he fights a multi-front trade dispute that has roiled markets and threatens the global growth outlook.
Meanwhile, the US-Saudi deal represents a challenge to market fundamentals. If accurate, the 2 million barrel per day figure cited by Trump is the upper end of Saudi Arabia’s excess crude supply, which ranges between 1.5 million and 2 million, according to estimates from the Energy Information Administration.
“This is the biggest public test of Saudi’s spare capacity,” noted Helima Croft, global head of commodity strategy at RBC Capital.
Separately, the agreement is also fraught with geopolitical consequences. Iran — which along with Venezuela resisted OPEC’s deal to ramp up capacity — is being targeted with a new round of sanctions meant to squeeze the government Tehran.
Since last month, when Trump pulled out of the nuclear which lifted most sanctions in 2015, the rial currency has dropped up to 40 percent in value, prompting angry protests by bazaar traders usually loyal to the Islamist rulers.
Indeed, John Kilduff of Again Capital, who also questioned Riyadh’s ability to pump that much additional oil, said the U.S.-Saudi accord would “most certainly anger the Iranians, who just left OPEC confab last week with an agreement that production would not be raised.
Given that Saudi Arabia had to cajole Iran and Venezuela to agree to an output boost last week, the new deal may be seen as “attempt to stir the pot in the Middle East,” Kilduff added.
“The Trump administration is pushing hard to squeeze and isolate Iran to the breaking point,” he said. “Don’t be surprised if Iran ups the ante and starts to threaten shipping interests in the Strait of Hormuz as a counter measure.”