April 17, 2019

NOPEC and the De-dollarization of Oil Trading

NOPEC and the De-dollarization of Oil Trading

The No Oil Producing and Exporting Cartels Act (NOPEC) has dominated the headlines in recent months, threatening to cause a global diplomatic and economic impasse between the concerned parties.

The bill seeks to limit the powers of The Organization of the Petroleum Exporting Countries (OPEC), with reference to oil production as well as the consequent influence in the price of the vital commodity.

If passed (and that is a big ‘IF’), the Act will lift the sovereign immunity which is accorded to the national oil companies of OPEC members and will allow for legal action to be taken against them under the US Antitrust law. This includes action against several of their anti-competition activities.

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Understanding NOPEC

Under US Federal law, legal action cannot be taken against foreign governments for predatory pricing or breach of antitrust laws. This is what NOPEC seeks to address, and thus, extend consumer protection against the motley OPEC cartel.

But this is not the first time the bill has been discussed in the Senate. It was first introduced in June 2000 by Senator Herb Kohl and has been tabled 16 times since then and has never been signed into law. But there is a new twist this time around – President Donald Trump.

In 2011, before he became President, Trump supported NOPEC even though he is yet to declare his support for the same since he was sworn into office. Instead, he has been a strong advocate for US-Saudi relations, even in the wake of the controversial killing of US-based Saudi journalist Jamal Khashoggi in 2018. Still, who can predict how the erratic President, well known for his irritability with high prices, will act if/or when the bill lands on his desk?

Reaction of OPEC and non-OPEC States to the Act

OPEC’s response to NOPEC hitting the wires has been predictable – stern rejection, with an even sterner warning. Saudi Arabia, OPEC’s informal kingpin, has threatened to sell its oil in currencies other than the dollar if Washington goes ahead and passes the bill. If this were to happen, the dollar’s position as the world’s reserve currency would seriously come under threat.

The greenback is widely referred to as the petrodollar, owing to its hegemony in the global trading of the ‘black gold’. By weakening its stranglehold on global trade and finance, the US’s ability to impose sanctions around the world would also be in jeopardy.

Riyadh, with its influence over other OPEC members, has played a great role in placing the US dollar on the high pedestal it enjoys in global trade. A huge chunk of oil is denominated in dollars, but can Saudi Arabia manage to pull down the greenback?

Alongside the threat of ditching the petrodollar, Saudi Arabia could also liquidate its US assets. The Kingdom holds about $160 billion in US treasuries and has close to $1 trillion invested in the country. Riyadh could also remove the dollar peg of its currency that has been in place since 1986.

Impact on the USA

OPEC has been categorical that the NOPEC would not serve US interest, and they could have a point. Unlike in previous attempts when the US was a major importer of oil, the world’s largest economy now pumps more than 9 million barrels of oil per day, almost the same amount as Saudi Arabia, and it is projected to manage even more as its shale oil ventures continue to boom.

As an importer, lower prices made sense, but now as a major producer, stability is more important. The economic effects of the NOPEC can run deep into the US economy.

Shale oil companies have sought huge capital assistance from US banks, and oil fluctuations or even lower prices will hinder their ability to meet their repayment obligations. Combined with an assault on the US dollar, the impact on the US economy can go beyond intended consequences.

Reaction of Qatar

The talk of NOPEC has already had one casualty, with Qatar quitting the cartel as it pursues US expansion. But their departure has been dismissed as inconsequential and motivated purely by politics rather than economics.

Qatar ranked 11th in the 15-nation cartel and was responsible for less than 2% of the organisation’s production. The immediate impact of NOPEC though, if passed, would be lower oil prices. Other oil and US dollar derivatives, such as the dollar index, would also face massive headwinds.

Trading Oil

On the flipside, the NOPEC talk could just be another classic Trump rhetoric to push OPEC to keep oil prices low. Trump has consistently been calling on the cartel to pump more oil, even linking his demands on the political support Riyadh has received from his administration.

Lower oil prices are great for the American consumer and it is always a profitable venture politically to attack OPEC in a country where they now enjoy public sympathy.

No matter the motive, NOPEC will always be a major sentiment mover in the oil market. With the bill in the headlines, there will be many lucrative opportunities for global traders in the oil market. It is prudent to follow the news to pick out these money minting opportunities and to trade oil in the financial markets.
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