Trump thanks Saudi Arabia for its cheap gas

By Thomas Heath and Damian Paletta | Washington Post

WASHINGTON – The rapid and steep drop in oil prices has been on Wall Street for weeks and is good news for 30 million US travelers as they embark on a busy Thanksgiving season.

But the dramatic decline has negative consequences, as several energy companies, large and small, have seen their prices drop, even as President Donald Trump has been applauding the lowest oil prices for more than a year.

Wednesday morning, the President tweeted:

"Oil prices are down. Awesome! Like a big tax break for America and the world. Enjoy! $ 54, was just $ 82. Thanks to Saudi Arabia, but let's go lower! "

"It's a job," said Nancy Tengler, chief investment officer at Heartland Financial. "That's all, it's the problem. The United States produces 11.5 million barrels a day. We are the largest producer in the world. There is just more supply than demand right now. If Saudi Arabia continues to pump and the exemptions granted to Iran remain in place, prices will remain low. "

The current surplus is largely attributed to a miscalculation between the demand and output of major producers, including Iran. A strong dollar also weighs on oil prices because it makes oil more expensive for much of the world. Oil prices therefore tend to fall.

Several companies were victims of the price decline. Small and medium-sized independent oil companies that rely on fracking are seeing their profit margins eroded, hurting stock prices. Newfield Exploration share price is down 39% this year. PDC Energy shares have lost about 30%. Oasis Petroleum fell 14% and Apache Corp. about 20%.

Both benchmark Brent Crude and West Texas Intermediate saw a sharp drop in prices on Tuesday, but rebounded on Wednesday despite a report that crude inventories would have risen nearly 5 million barrels last week. West Texas Intermediate was up more than 3% to $ 55.29 at 13 hours. The Brent benchmark was up 2.2% to 63.94 USD. Both are down more than 20% from their peak in early October.

The magic number is $ 50 a barrel. Well below that, businesses are starting to really hurt.

Continental Resources oilman Harold Hamm is one of the industry leaders Trump has relied on for his advice.

In an interview in January, Hamm said, "I do not think at all we will see extreme prices around $ 80 or $ 90 a barrel in the future. It's not in the interest of producers around the world. We are not trying to do that, and OPEC does not think so either. When you read their reasoning, it is based on a healthy market. "

Hamm said the breakeven point for American shale oil producers was only $ 35 a barrel and sometimes even $ 45 to $ 50 a barrel.

"But in the beginning, when OPEC started to invade the market, they thought that high-cost production was $ 70 in many of these projects. [geological] play, he says. "What they quickly discovered was that it was really wrong. This number continued to fall. They realized that "these guys could complete with us". That's when they had to reverse their tactics. "

Frank Verrastro, an oil expert at the Center for Strategic and International Studies, said he anticipates greater volatility in oil prices until the December 6 meeting of the Organization of the Petroleum Exporting Countries, where he believes that the cartel will reduce its production price close to $ 80 per barrel.

In the meantime, he said, "the fund managers are waiting for an event that will catalyze a price change, that it is a break in supply." , from a geopolitical event or from a news that demand is stronger than expected ".

Verrastro said the president had one thing in mind: keep oil prices low, which is a huge boost for consumers.

"The President is thinking, Happy Thanksgiving. I give you lower prices, "said Verrastro.

US giants Chevron and ExxonMobile saw their shares climb Wednesday, but both lost around 10% in 2018.

Oil is a booming business. The price drops when the supply exceeds the demand. Producers reduce and slow down their production because of price suppression. When demand exceeds supply, producers start drilling again and the cycle resumes.

The United States is the world's largest consumer of oil with about 21 million barrels a day on the 100 million barrels produced daily. It is also one of the major oil producers, thanks to the revival of shale oil over the last half decade.

Oil and gas account for about 7.6% of the US gross domestic product. Low prices have a beneficial effect on the economy as a whole, in particular by moderating the rate of inflation. By helping to keep inflation at a low level, low oil prices can stem rising interest rates, including for mortgages and auto purchases.

Oil prices fell sharply on Tuesday after Trump approved close ties with oil swing producer Saudi Arabia, the de facto leader criticized for the murder of journalist Jamal Khashoggi, a Washington Post reporter.

Saudi Arabia's willingness to maintain production is essential to keep oil prices low and the president happy. The oil giant was planning a cut in production at the OPEC meeting and the OPEC meeting in December, which could drive up prices.

Trump has repeatedly tried to interfere in key economic decisions made by others and is particularly irritated with interest rates and oil prices. He believes that low interest rates and low oil prices will help revive the economy, though he often denies concerns that White House interference in these decisions could distort markets.

For months, Trump lobbied OPEC to drive down oil prices, even going as far as to rally the coalition on Twitter.

"It looks like OPEC is back in the game," he wrote. "With record amounts of oil all over the world, including ships loaded at sea, oil prices are artificially high! Not good and will not be accepted!

Trump imposed harsh economic sanctions on Iran, limiting the ability of other countries to buy Iranian oil. The decision is expected to push up oil prices, which would make the costs higher for consumers and businesses, but oil prices have remained low in recent months.

In a move that has limited the impact of Iran's sanctions on oil prices, the White House has granted temporary waivers to eight countries, allowing them to continue buying Iranian oil, at least for a time.

This week, Trump's comments were part of a defensive defense against his relationship with Saudi Arabia, refuting US intelligence reports that Saudi high-ranking officials had participated in Khashoggi's assassination.

Last year, Trump praised the performance of the economy, particularly the stock market rally. However, when the market experienced turbulence, Trump found other elements to highlight.

Energy was one of the most affected sectors of the Standard & Poor's 500 index, largely due to the decline in oil prices. The sector fell 3.29% on Tuesday, the highest of the 11 sectors.

Steven Mufson of the Washington Post contributed to this report.