Trump Presidency Heralds Warmer Ties with Saudi Arabia

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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• A new Trump presidency could improve relations between the U.S. and Saudi Arabia.
• U.S. sanctions on Iran could have a bullish effect on oil prices, but that effect is likely to be limited.
• The most likely scenario for oil prices, it seems, is one in which plain old fundamentals would prevail.

The Biden presidency was not the best of times for U.S.-Saudi relations. After Biden declared Saudi Arabia a pariah state and signaled a commitment to the energy transition, the fate of the bilateral relations was more or less sealed. Now, with Trump, this may well change. Because the U.S. and Saudi have common oil interests.

On the face of it, the United States and Saudi Arabia are rivals in the oil space, and the U.S. has played a lead role in Saudi’s loss of clout over international prices with its record-high production. But, according to Reuters columnist Yawen Chan, both countries would benefit from Trump’s stated intention to step up pressure on Iran, targeting its oil industry with stronger sanctions.

These sanctions would limit the availability of Iranian crude on international markets, Chan argued in a recent column, ultimately shrinking global supply and boosting prices. This is something that both U.S. oil producers and Aramco need, Chan notes. For U.S. producers, it’s rising breakeven levels that necessitate the higher prices. For Aramco, it’s Crown Prince Mohammed’s ambitious economic diversification plans that have pushed the state budget breakeven to $100 per barrel of oil. In short, both America and Saudi Arabia need higher oil prices. To get them, Trump could slap new oil sanctions on Iran.

Yet, there is a problem with this scenario. The problem lies in the fact that most oil traders share an unshakeable conviction that oil demand is weak and getting weaker by the hour because China is not importing crude at post-lockdown rates. Besides, stronger U.S. sanction action against Tehran is pretty much a given, so any price reaction to Trump’s foreign policy would be muted.

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In terms of volume, Iran’s oil exports may also turn out to be too small to matter for prices. The latest data, for November, shows an average daily export rate of 1.31 million barrels of Iranian oil going to China. China is virtually Iran’s only client, especially now that Islamist rebels have taken over Syria. The November figure is about half a million barrels daily lower than the October average and the lowest in four months, Iranian media reported. So, it’s safe to say that Iran has been exporting over 1 million barrels of crude daily this year but less than 2 million barrels daily.

The International Energy Agency has forecast a global oil supply overhang of around 1 million barrels for 2025, as well as non-OPEC supply growth of about 1.5 million barrels daily. In other words, for those following the numbers, if Trump does sanction Iran more heavily and Iranian oil flows slow to a trickle, this would essentially restore balance in the global oil market, provided that non-OPEC producers live up to expectations, that is.

In other words, —at least until demand resilience surprises those watching exclusively Chinese imports and CPI data.

Yet, while sanctions on regional adversary Iran could be received well by Riyadh, this will not be the case with Trump’s policy with regard to Israel and Palestine. A staunch Israel supporter, the president-elect is more likely to irritate the largest Arab state in the Middle East with his policy there than win it over, regardless of breakeven oil prices. And that’s without mentioning the tentative yet obvious effort by both Saudi Arabia and Iran to find some sort of common ground and end decades of rivalry. Palestine may well become this common ground.

The most likely scenario for oil prices, it seems, is one in which plain old fundamentals would prevail. With high breakeven costs, U.S. drillers that can’t turn a profit at current prices would reduce drilling. The Saudis look determined to keep the caps on their production. There are already revisions to the predicted 2025 supply overhang. It’s only a matter of time before this prediction is revised to a deficit as demand surprises yet again, benefitting both the U.S. and Saudi Arabia.

By Irina Slav for Oilprice.com

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