WTI crude oil prices have surged more than 7 percent in the past two days following surprise news of an OPEC production cut deal. On Wednesday, OPEC
agreed to cut global crude oil production from 33.4 million barrels per day to an anticipated range of 32.5–33 million barrels per
day.
While oil investors wait to see the details of the OPEC deal and how high they will carry oil prices, Congress may have done its
part to derail the rally.
On Wednesday, the Senate and the House of Representatives voted to override President Obama’s veto of a controversial bill that
would allow 9/11 victims and their families to pursue legal action against the Saudi Arabian government.
Saudi Arabia has issued multiple warnings to the United States not to allow the bill to pass. Back in June, Saudi Minister Adel
al-Jubeir told reporters that approving the Justice Against Sponsors of Terrorism Act (JASTA) bill would not be in the U.S.’s best
interest. Al-Jubeir warned that the law might negatively impact investor confidence in the U.S. Saudi Arabia currently owns between
$500 billion and $1 trillion in U.S. government Treasury bonds and other assets.
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In addition to Obama’s opposition to the bill, the CEOs of Dow Chemical Co (NYSE: DOW) and General Electric Company (NYSE: GE) both sent letters to Congress warning of the potential economic dangers of a
souring diplomatic relationship with Saudi Arabia. Defense Secretary Ash Carter also petitioned Congress not to reject the veto,
saying that the bill would threaten “important counterterrorism efforts abroad.”
While the sale of U.S. Treasuries would be the more likely route of retaliation for Saudi Arabia, the Kingdom could also choose
to abandon the new OPEC agreement and once again take aim at the struggling U.S. oil & gas industry. While the average production cost of a U.S.-produced barrel of oil is between $20 and $25/bbl,
Saudi Arabia produces oil at less than $10/bbl and could easily afford lower oil prices.
So far, at least, the market seems to think that Saudi Arabia is simply bluffing. In the past two days, the United
States Oil Fund LP (ETF) (NYSE: USO) is up 7.3 percent
and the iShares Barclays 20+ Yr Treas. Bond (ETF) (NASDAQ: TLT) is down just 0.06 percent.
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