Trump ask for more oil could be linked to sanctions plans, but OPEC may be circumspect

US President Donald Trump's request for Saudi Arabia and OPEC to increase oil production may be linked to Trump's intention to ramp up sanctions on Russia and Iran, but the bloc may not be interested heeding the call without actual supply shortages, according to experts following the issue.

"It is unclear that the Saudis would do much without risking prices dropping below their comfort zone," David Goldwyn, president of Goldwyn Global Strategies and chair of the Atlantic Council Global Energy Center's Energy Advisory Group, said.

In a Jan. 23 speech to the World Economic Forum in Davos, Trump said he is "going to ask Saudi Arabia and OPEC to bring down the cost of oil," adding their decision not to "do it before the election ... didn't show a lot of love."

"If the price came down, the Russia-Ukraine war would end immediately," Trump said without further explanation. "Right now, the price is high enough that the war will continue."

NYMEX March WTI settled 4 cents higher at $74.66/b Jan. 24 and ICE March Brent climbed 21 cents to $78.50/b.

Trump wants prices below the threshold that could lead OPEC+ to initiate their planned supply increase, said Jim Burkhard, vice president of research for S&P Global Commodity Insights. "How the new Trump Administration and OPEC+ leaders manage their differing economic and geopolitical interests will be key in whether OPEC+ increases production at prices in the $70s or not until prices are in the $80s or higher," he said.

Trump's ask of OPEC and Saudi Arabia reflects dueling policy goals, said Rachel Ziemba, a senior advisor with political risk consultancy Horizon Engage. He wants cheaper oil prices, but he also wants to be able to use energy sanctions as a political tool, especially with respect to Iran, she said.

While Trump has officially been quiet on Iran policy, he is widely expected to return to maximum pressure oil sanctions on Tehran. In Trump's first term, strict sanctions pushed Iranian crude output as low as 2 million b/d. Iran's output rose under the Biden administration, with Tehran producing 3.22 million b/d in December, according to the latest Platts OPEC+ survey from Commodity Insights.

OPEC interests

Despite Trump's ask, OPEC is unlikely to do much in the near-term and instead wait to see whether there are actual supply shortages from the scramble to replace Iran and Russian supplies, Ziemba said. Ultimately, OPEC is likely to focus on its long-term interest and that includes keeping Russia involved in any OPEC+ arrangement, she said.

"Thus, if Trump follows through with plans for sanctions on Iran and those on Iraq for smuggling Iranian oil, and there are actual shortages, then [Saudi Arabia] will likely pump a bit more or stick to long-deferred plans of supplying more, but they will be circumspect," Ziemba said.

Ellen Wald, president of Transversal Consulting and a senior fellow with the Atlantic Council, struck a similar note. OPEC will likely respond to the request by saying that demand forecasts do not indicate a need to increase supply at this juncture, but that OPEC is prepared to increase supply on short notice if market conditions indicate, she said.

"Saudi Arabia might respond that since the United States is currently the world's largest oil producer, perhaps President Trump should ask domestic oil companies to cut prices for American consumers, but that kind of flippancy probably wouldn't go over well with Trump," she said.

It's also possible that Saudi Arabia will privately pressure the Trump administration to enforce the sanctions on Iranian oil more stringently and offer in return put barrels it has voluntarily kept off the market back into production along with assurances that OPEC will increase production as planned in the second quarter, Wald said.

"This could result in a net price reduction due to more barrels on the market but with a revenue gain for Saudi Arabia because it will have a larger share of the market," Wald said.

Eliminating Houthi threat

Another way to reduce oil prices would be to reduce costs for producers by eliminating the Houthis as a threat to shipping, which would cut insurance costs significantly, Wald said.

The Trump administration on Jan. 22 re-designated the Houthi rebels in Yemen as a foreign terrorist organization, reversing the Biden administration's decision to remove the designation for humanitarian reasons.

"Under President Trump, it is now the policy of the United States to cooperate with its regional partners to eliminate the Houthis' capabilities and operations, deprive them of resources, and thereby end their attacks on US personnel and civilians, US partners, and maritime shipping in the Red Sea," the executive order said.

Trump has already been dangling the idea of making Saudi Arabia his first overseas visit in exchange for a rhetorical investment commitment from the Saudis, Goldwyn said. With the oil price comment, it looks like the president is seeking a more concrete upfront commitment before he decides about the visit, he said.

Trump's policies do give him sway in the region, Goldwyn said.

"He has a great deal of leverage, from the direction he takes on Iran policy, to taking military action against the Houthis and the actions he takes on sanctions on other producers," he said.