As polling shows the Democrats’ lead in the generic ballot diminishing to within the margin of error, there’s palpable concern in DNC circles that the much-anticipated “blue wave” of Trump backlash they’ve been counting on to sweep them back into power in the 2018 mid-terms may have already crested and begun to recede. This has prompted them to scramble for substantive messages with which to woo voters, especially the working middle class, beyond anti-Trump hysteria. One issue they have homed in on is the price of gasoline, which has risen 30% year-on-year. Sensing an opening, the Democrats are attempting to draw a nexus between Trump administration policies — scrapping the Iran nuclear deal in particular — and rising oil prices, and with them increased pain at the pump. Yet, even a cursory review of the rise of benchmark crude oil futures shows this to be a stretch at best and a point the GOP can and should refute.
Senate Minority Leader Chuck Schumer (D-NY) recently presented his party's case: “President Trump’s reckless decision to pull out of the Iran deal has led to higher oil prices. These higher oil prices are translating directly to soaring gas prices, something we know disproportionately hurts middle and lower income people.”
His argument is both simplistic and demonstrably false in that Mr. Trump’s May 7 decision to scrap the Iran deal is just one of many pieces to the two-year-long oil rally puzzle . . . and one must think the Democrats know this. If they don’t, then they have no business formulating energy policy. Global demand for oil is over 100 million bpd (IEA) and is slated to rise in the next decade. This demand is fueled by insatiable appetites for cheap energy, especially in places far removed from Washington, D.C. Beijing comes to mind. In March, Chinese crude oil imports hit their second-highest level on record, while refined fuel exports also jumped to an all-time high, up by 43% compared to March 2017. According to Reuters, China’s crude oil imports in the first quarter increased by 7% on the year to around 9.09 million bpd — a rise of almost 595,000 bpd on average compared to first quarter 2017. Refinery runs in March also jumped to record highs.
Layered on top of growing demand is the reduced output of the failing petro-states such as Libya, Angola and, most concerning, Venezuela. In March, Venezuelan oil production fell to the lowest levels since 1988. Production decreased from 2.3 million bpd in January 2016 to 1.6 million bpd by January 2018.
Adding fuel to these bullish fires, starting in 2017 OPEC and Russia made a concerted effort to force a rebound in crude oil prices from the February 2016 lows just north of $26/bbl in the spot month. The cuts have worked their way through global stockpiles, which have seen a 10% decline from February 2017 to May 2018 (EIA). In fact, their cuts have been effective enough to offset the expansion of shale oil that will make the U.S. the largest oil producer in the world in the next few years.
Americans, too, are doing our part to drive up prices at the pump by driving more. AAA estimates 5% more Americans traveled by car this past Memorial Day compared to 2017 and overall 41.5 million Americans hit the road, the skies, the rails or the waters this weekend.
Did scrapping the Iran deal have an impact as the Democrats are suggesting? Sure. Any policy that threatens to take off the market 2.7 million/bpd from an intrinsically hostile nation that sits astride the choke-point Strait of Hormuz, through which 20% of the world's oil passes, will send ripples through the futures markets . . . as happened with the July WTI run-up from $69.42/bbl before the Trump announcement to the May 22 high print of $72.90/bbl eleven trading days later. But this may have been a short-lived rally based on fear and speculation. And it was the final intermediate push of a bull market long in progress since bottoming out in February 2016.
The real culprit of rising (and falling) oil prices, and thus the price of the pump that follows them, is supply-and-demand . . . not nefarious speculators as Messrs. Sanders et. al. tried to blame in January of 2014, or Mr. Trump’s policies today. After all, national gas prices reached their zenith of an average of $3.94/gal in April 2012 right in the middle of the Obama presidency . . . a point that seems to be lost on Democrats with selective amnesia.
As with the call to rein in speculators back in 2014, Democrats may have once again chosen the wrong moment to raise the issue of rising energy prices. Before speaking out further, Mr. Schumer et al. might wish to consult the futures markets. As of this writing (June 6) July WTI prices settled at $64.73, off 11% from the $72.90 high. Wishing to stay in good stead with an administration that has both lambasted OPEC for “artificially high” oil prices, and yet has been most accommodating re: its concerns over Iranian hegemony in the Persian Gulf region, on May 25 Saudi Oil Minister Khalid Al-Falih announced a shift in policy that all but gave a green light for a market sell-off, saying OPEC and its allies were "likely" to boost output in the second half of the year.
Oil prices are volatile and can tumble as rapidly as they climb. As such, the Democrats may find themselves ducking a boomeranging talking point if energy prices decline from now until November. Given their timing pouncing on rising oil prices as a political issue in the past, all else being equal, the DNC may once again have called the top in the market. At least for a period long enough to hurt them in the mid-terms . . . and for savvy oil traders to profit from shorting their chronic market-timing ineptitude.
Brad Schaeffer is an historian, author, musician, and commodities trader. His eclectic body of writings have appeared in The Wall Street Journal, New York Daily News, and a variety of well-read blogs and news outlets, and he has appeared on television as a political and business commentator on CNBC and Fox Business. His debut novel, OF ANOTHER TIME AND PLACE (Post Hill Press) a work of historical fiction, will be on bookshelves in November 2018. You can pre-order his book here.