For several months, the price of WTI crude has been trading in a range between $67/bbl and $77/bbl and the price of Brent crude has been trading in the range between $70/bbl and $80/bbl.
The rangebound nature of oil prices is the result of factors governing the market. These factors include muted oil demand growth with China’s economy sputtering. However, despite the tensions in the Middle East and the ongoing conflict between Russia and Ukraine, the oil market has dismissed, for the most part, the geopolitical risk because the flow of oil has continued, for the most part, unabated. These factors, along with the concerns about the level of oil supply that has been shut-in by OPEC+, are keeping a lid on oil prices.
The return of Donald Trump to the U.S. presidency has the potential to shift the oil market by affecting these factors, including supply/demand fundamentals and macro-level factors such as geopolitics and macroeconomics.
Oil supply
Trump’s energy policies will be more friendly to the oil and gas sector, including less-intrusive regulations, along with efforts to encourage allies to import more oil and gas from the U.S. The U.S. oil sector, however, does not exist in a vacuum—and signs that the U.S. is ramping up production could provoke a response from OPEC+ because of the perceived threat to its market share and ability to influence the oil market.
Members of OPEC+, notably Saudia Arabia, have been willing to reduce their supply to provide support for oil prices, but this approach will be reassessed if members of the cartel feel that their market position is being eroded. If the threat is viewed as being significant, OPEC+ could bring on additional supply to collapse oil prices in an attempt to inflict financial harm on non-OPEC producers, including U.S. producers, to make it more difficult to sustain capital investments.
Oil demand
It is likely that Trump will push to reduce support for electric vehicles (EV) and for alternative fuels, which, in turn, should increase demand for oil and refined products. The impact on demand, however, is likely to be only on the margins—at least through the four years of the Trump administration—given the current momentum behind EVs and alternative fuels in Europe and Asia.
Geopolitics
The foreign policy approach of the Trump administration is likely to change the current geopolitical dynamics.
It is likely that the U.S. will put more pressure on Iran, including enforcement of sanctions on Iran’s oil exports, and Israel is likely to have the opportunity to be more aggressive in confronting Iran.
The Ukraine-Russia conflict also is likely to be affected by the next administration, with a greater likelihood for a negotiated settlement. While Trump will face some resistance from his own party and others, it is our view that he will be inclined to push for a negotiated settlement at the beginning of his administration when he will have significant political power.
With a negotiated settlement, it is likely that some additional Russian crude (and refined products) will return to the European market and other OECD markets; however, the magnitude will be limited by new supply patterns that have been established in response to the sanctions that have been imposed on Russian oil exports.
Macroeconomics
Trump’s trade policies will put further pressure on Europe’s economy with the threat of a 10% to 20% tariff on imports from Europe. Similarly, China is facing the threat of tariffs on its exports to the U.S that could be 60% and higher.
While the threat of tariffs could well be a negotiating tactic, it is likely that some additional targeted tariffs will be put in place. Additionally, since the election of Trump, the U.S. dollar has appreciated. At the end of the week of the election, the U.S. Dollar Index reached 105.00. In comparison, on Sept. 26 the U.S. Dollar Index was 100.38.
One reason for the increase in the U.S. Dollar Index is the weakness in the euro, which fell from 1.1178 USD on Sept. 26 to 1.0719. The Chinese Yuan has also weakened during this time, from 7.0117 to 7.1791. While there is an ongoing debate about the ultimate effect of Trump’s tariffs policy on the dollar, at least for the short-term the stronger dollar will put downward pressure on oil prices.
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