Crude is in for tumultuous times. Panic is taking over markets. And screws are being tightened on Saudi Arabia.

In a blunt, truly Trump style move, using undiplomatic language, President Trump warned King Salman of Saudi Arabia last week, saying he would not last (as the king) “two weeks” without the backing of the US military. This was a blatant effort on part of the president to pile pressure on one of America’s closest allies over the rising cost of oil.

Trump’s tirade against the Organisation of Petroleum Exporting Countries (Opec) has been on for some time now. While addressing the United Nations General Assembly on Sept 25, he was blunt as usual, saying oil producers were “ripping off the rest of the world.”

“Nobody should like it. We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.”

Earlier on Sept 20, he weighed into the issue via Twitter: “The Opec monopoly must get prices down now!”

With just 30 per cent of the global market share, “is Opec a monopoly” is anybody’s guess. This could definitely be a moot point for some enlightened debate.

In the effort to cool down prices, Trump also spoke to Saudi monarch on Sept 29. Saudi Press Agency later reported that the two leaders discussed “efforts to maintain supplies to ensure the stability of oil market and ensure the growth of global economy.”

The US State Department has also jumped into the fray. It took the unusual step of issuing a statement last Wednesday asking Opec to boost production by tapping the supply buffer it maintains. While reminding Riyadh that security ties with the US allowed it to foil “numerous terrorist attempts against Saudi and foreign targets” and “deter external attacks”, the State Department even gave a figure for how much more oil Opec needed to pump - 1.4 million barrels per day (bpd).

President Putin has ridiculed the growing pressure on oil-producing countries. In comments at the Russian Energy Week Conference in Moscow last week, he blamed Washington for the current market woes, saying that President Trump (just) needs to look in the mirror to find the person responsible for higher oil prices.

Washington seems retreating somewhat.

For almost the first time, it was hinted that the administration was actively considering waivers on sanctions to countries reducing imports of Iranian oil, a US government official was quoted as saying by Reuters.

Russia has added 100,000bpd production in September, taking its output to a post-Soviet record high of 11.36mbpd.

Saudi Arabia has also upped output. The kingdom is already pumping near-record levels and seems prepared to raise it further.

Pressure on Riyadh is intense. It has rarely been witnessed.

A statement by the State Department is almost unprecedented. At least over the last three decades, one does not recall any such thing happening ever.

Yet, this brings to surface the issue of available spare capacity. It is already running thin. “This is the lowest level of spare capacity in the global system relative to demand that I’ve ever seen,” Jefferies Financial Group analyst Jason Gammel said in an interview on Bloomberg television. “Spare capacity is moving to a precariously low point,” he added.

Even if Opec somehow steps in to fill the (Iranian) gap — and Saudi Energy Minister Khalid Al-Falih said on Thursday that it could — the oil market would still be in uncharted territory. Even during the worst crises of the past two decades, including the US invasion of Iraq and Libya’s civil war, Opec has never been forced to pump flat out.

If President Trump gets what he wants from Opec, it might not bring an end to the high oil prices he’s been complaining about for months. And the situation may get even worse when sanctions against Iran take effect with full force, next month.

From early November “the market is probably susceptible to further upside moves in price,” Gammel emphasised.

The situation is simply beyond Riyadh!

Published in Dawn, October 7th, 2018