The Great Jawbone Battle

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There's a really interesting article just published on CNBC, by Tom DiChristopher, casting OPEC's decision to cut production in a big way come the turn of the year as a battle of Nationalism between Saudi and the Trump Administration.  It's true that leadership in both countries have adopted the rhetoric of Nationalism.  However, it seems to me that they are also engaged in a battle of words attempting to move the price of oil.  The Trump Administration seems to be convinced that lower oil prices are good for America or more accurately for his political fortunes.  There are clear signs that a slow down in the US economy may be in the cards for next year, but how severe is a matter on conjecture for sure.  Rising oil prices could have an additional negative impact, from his point of view, driving gasoline prices up, which act as an immediate tax on consumers.  However, rather than follow the traditional path of quiet diplomacy to influence Saudi to keep markets "balanced", Trump engaged, as is his custom, in Twitter Diplomacy.  I doubt it affected the final policy announced by Saudi, but it certainly worked to create the appearance of a rebuke to the Trump Administration.  

Saudi, for its part, departed from its normal approach of providing vague statements when it's short-term oil production policy diverges from US interests.  As DiChristopher points out, despite appearances, market conditions and worries over a potential slow down in both the global and US economy probably drove their decision making rather than politics.  According to DiChristopher, the IMF estimates that Brent Crude needs"to rise about $25 a barrel" for Saudi to "just balance it's budget".  Furthermore, Saudi gave assurances that it would implement the cuts in just 2 months rather than the more normal drawn out process. In the backdrop is the fact that Saudi increased production, from October to November, quite significantly.  It's not surprising since sentiment way back then was that the world and US economy would continue to grow and that supplies would continue to be tight. Now, the outlook is more grim and the Financial News Talking Heads are saying that markets are balanced.  The proposed cuts, if they actually come to fruition, will look even larger when taking the Oct-Nov surge into consideration.  It makes sense to use rhetoric as a way to amplify the effect and spark a Jawbone Rally.  

At the end of the day though, not much has really changed.  The markets and economic realities are driving policy.  The louder than usual rhetoric is more about driving the news cycle.  You have the Trump Administration attempting to position itself to take credit for lower gasoline prices while being able to blame the Saudi's if prices rise. Global geopolitics 101.  The Trump Administration is learning what most US President's soon discover.  There's little they can do to affect oil prices.  The Saudi's, struggling with deteriorating internal finances, are simply moving to fend off what could be  further collapse of crude prices should supplies begin to rise visa vie demand growth outlook in 2019. The bearish sentiment and real life supply/demand concerns leave them with few choices.  In the end, the realities of the market place, internal political considerations, and Trump's penchant for Twitter Diplomacy have placed a premium on Jawboning.  Same as it ever was.  

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