Trump’s policies can scale up oil market volatility
When the final result of the US elections was announced and Donald Trump won, markets around the world went into a tailspin where commodities and stock markets fell precipitously.
But the market meltdown soon fizzled out and prices recovered to near previous levels regardless of the election result. Brent crude prices fell to $43 (Dh158) a barrel on November 9, but recovered to $45.5 a barrel the next day as the focus shifted from Trump’s victory to expectations from Opec.
Here we have to remember that oil prices have been under pressure for some time now, with Brent prices close to $54 a barrel around mid-October but falling to $44.68 a barrel as I write. At the same time, Opec’s basket of crude oil prices fell from $49.06 a barrel on October 19 to $42.67 on November 10.
After the initial knee-jerk reaction, analysts realised that Trump’s energy policy promises are unlikely to affect the markets in the short term as many of them may take years to materialise if ever implemented. Others may be implemented soon as he takes office in just over a couple of months’ time, but their impact will take much longer to become noticeable.
And let no one forget that Trump’s election campaign is like any other politician’s in exuding showmanship rather than being well-thought out policies. So it remains to be seen if he can make the US free from Opec or if he will occupy Iraq and take its oil as the cost of its liberation or make Gulf countries pay for their protection.
Even if US imports from Opec turn to zero, Opec’s policy would still affect oil prices internationally and the US can never be isolated from the international market. The promise to make the US energy independent has been almost the promise of every president since 1973. Trump is no different and it remains to be seen if he will succeed and whether this independence is actually in favour of the US economy, which is a major player in the energy markets by way of its imports and exports.
Cancelling NAFTA is off the table now as Trump’s demands for renegotiation is likely to be positively met by Canada and Mexico. The agreement has stood the test of time for decades and is unlikely to be folded up easily, especially as it has a large energy element and many arteries through oil and gas pipelines.
Unlike Obama, Trump has promised to approve the Keystone XL pipeline, which will open the route for more Canadian crude oil to refining centres in Texas and then exports.
On Iran, Trump’s promise to throw out the nuclear agreement is unlikely to come to fruition because that was an international agreement approved and guaranteed by the UN Security Council. However, Trump can certainly make a lot of trouble throughout the implementation. Oil companies who were considering deals with Iran are probably having second thoughts.
This may make Iran more cooperative with other Opec members in the upcoming meeting at the end of this month.
Trump is expected to rein in the Environmental Protection Agency (EPA) to support his promises regarding the oil, gas and coal industries. Nick Cunningham of oilprice.com said recently that Trump “is widely thought to staff the agency with oil-friendly free-market types.”
This will invigorate the shale oil and gas production, especially if oil prices appreciate. It will also breathe life into a declining coal industry as regulation on clean coal is relaxed.
How this would affect the US climate change policy and its international agreements remains to be seen. Trump promised to “cancel” the Paris Climate Accord. While he can’t actually do that, he can simply not adhere to US commitments.
This may make other countries follow suit and bring more uncertainties about the whole climate change outlook.
“Trump wants to end public spending on renewable energy” and “the production tax credit, which subsidises wind and solar, is something that could be on the chopping block,” writes Cunningham. This could “mean a much greater dependence on oil, and higher demand will lead to higher prices.”
Cunningham ends up by saying that “in short, oil and gas are potentially huge winners from Tuesday’s results. But all of this is just guesswork. Trump has been notoriously vague on policy details, so we will just have to wait and see.”
But there is fear of an economic downturn and some analysts have already reduced their forecasts for economic growth fearing a Trump trade war with major economic powers. This would pressure oil demand and prices and dent an already fragile market.
There is no doubt then that the next few months and beyond would be an interesting time in the oil market and we better hold on to our seats and watch the show.