Should The U.S. Protect Mideast Oil And Russia Lose Market Share For OPEC?

Ordinarily, these remarks would've played havoc with market sentiment, prompting crude prices to swing from the consternation caused to traders and investors.

But these are no ordinary times in oil.

So, the market took what was said on Monday in its stride. Besides, a host of other drivers—from bets on a second weekly drawdown in U.S. crude to threats by Washington to double down on Iranian sanctions—was battling for the hearts and minds of both oil bulls and bears.

In the end, crude futures ended the day mixed, with West Texas Intermediate crude up and U.K. Brent down, reflecting in a smaller way perhaps the uncertainty over near-term direction.

But as we go into a new session, it’s worth revisiting some of yesterday's potent remarks that got scant market attention.

U.S. ‘Unpaid Protector’ Of Mideast Oil

One was U.S. President Donald Trump’s rant about the United States being used as an “unpaid” protector of shipping lanes in the Middle East.

The other was Russian Energy Minister Alexander Novak’s caution that his country’s support for another round of OPEC+ production cuts was not a given—despite Saudi Arabia seeming convinced that Moscow should continue losing market share to U.S. crude exporters just to help Gulf oil producers.

As to Trump, he questioned why the United States is protecting oil shipping in the Strait of Hormuz, one of the world’s narrowest and riskiest passageways for crude tankers, and suggested that other countries pick up the tab for securing their own vessels there.

Said the president in a couple of tweets:

“China gets 91% of its Oil from the Straight, Japan 62%, & many other countries likewise. So why are we protecting the shipping lanes for other countries (many years) for zero compensation?”

“All of these countries should be protecting their own ships on what has always been a dangerous journey.”

While Trump’s use of “Straight” was obviously a misspelling for the strait in Hormuz, the message he imparted was clear.

U.S. Less Reliant On Persian Gulf Oil Now

Data shows that U.S. dependence on oil from the Persian Gulf is at a 30-year low as the shale crude revolution dramatically transformed the U.S.’s position, turning it from a net oil importer to a net exporter.

If that’s the case, then really why should protecting Middle East oil producers, particularly Saudi Arabia, be the job of the United States? Continuity of policy?

That might not be a top priority for Trump, who in his 30 months in office has torn up almost every global pact the U.S. has been involved in that he deemed wasn’t in the country’s best interest. And while he’s suggested in the past that some of the U.S.-Saudi ties needed reworking, it’s only now that he’s coming out forcefully against protecting the Hormuz waterway.

The U.S.-Saudi Arabia alliance is built on decades of security cooperation and strong business ties dominated by U.S. interests in Saudi oil. The relationship has survived severe challenges, including the 1973 oil embargo and the September 2001 attacks, in which fifteen of the 19 passenger jet hijackers were Saudi citizens.

The New York-based Council on Foreign Relations notes that since 9/11, successive U.S. administrations have held that Saudi Arabia is a critical strategic partner in the region.

Trump, particularly, took the relationship to greater heights as he and son-in-law Jared Kushner, who’s also senior adviser to the president, formed cozy ties with Saudi Crown Prince Mohammed bin Salman. While the murder of Saudi-U.S. journalist Jamal Khashoggi and its apparent link to the crown prince strained relations last year, Trump has focused on targeting Iran—the main rival of the Saudis—as the centerpiece of his cooperation with Riyadh.

U.S. Saudi Ties Good But Cracks Still There

But new cracks have also appeared in U.S.-Saudi relations, with the Riyadh-led OPEC cartel continuously pushing for higher oil prices with pacts such as that with Russia, to the dismay of Trump, who needs both global crude and pump prices in the U.S. to be low as he campaigns for reelection in 2020.

About 30% of all oil exported globally by sea travels through the Strait of Hormuz. A recent spate of attacks on oil tankers in the strait—all blamed on Iran, which denies any responsibility—has brought new focus on the waterway. Should the U.S. choose not to police the strait, it could mean even higher risks for oil supply and freight insurance costs in that region.

But even as Trump was questioning the role of the U.S. as an unpaid protector of oil tankers in the Middle East, Secretary of State Mike Pompeo was in Riyadh on Monday, discussing with the House of Saud the need “to promote maritime security in the Strait of Hormuz” and recognizing that “freedom of navigation is paramount”.

That may have been one reason for oil traders not to assign too much importance to the president’s tweets on the strait. Yet, Trump has opened up on the issue and is unlikely to let it go, so the market needs to pay more than meager attention to it.

Russia Wants To Asses G20, Talk To Industry Before Committing To Cuts

As to Novak: his remarks that Moscow wasn’t decided on extending production through the year end under the OPEC+ cooperation should have prompted a greater worry in the market.

Novak said Russia may affirm its commitment after seeing the outcome of the G20 talks between Trump and Chinese leader Xi Jinping.

He also said he was getting input from Russian oil companies.

That could be a problem for OPEC. Igor Sechin, the head of Rosneft (OTC:OJSCY), Russia’s largest oil company, is vehemently opposed to extending production cuts with OPEC, saying that would cost Russian oil a loss of market share to U.S. crude exporters.

Clearly, oil traders are downplaying two of the most important aspects in the market now.