The commodities market has largely been immune from volatility during the build up to the U.S. 2016 presidential election. However, Donald Trump’s unexpected victory has started to precipitate a new lease of volatility on the commodities market. It appears that oil investors will be most hit under a Trump presidency; hence, commodities traders with an exposure to oil might want to reposition their thesis on where crude oil is headed.
Here’s what a Trump presidency might mean for oil
In the build up to the election, Trump’s energy policy seems to be the only well thought out and coherent policy that he provided on the campaign trail. During the campaign, Trump unveiled his energy policy in a May 26 speech delivered in Bismarck. The speech, “An America First Energy Plan” explained Trump’s plan to stop OPEC oil from entering the U.S markets.
In his words, “America’s incredible energy potential remains untapped. It is a totally self-inflicted wound. Under my presidency, we will accomplish complete American energy independence.” He also explored deep rooted fears on how terrorist often get funding by getting control of oil pipelines. He noted that “Imagine a world in which our foes, and the oil cartels, can no longer use energy as a weapon.”
Victor Alagbe, an analyst at Stern Options observes that “the Trump presidency might face strong criticism, delaying filibusters, and outright rejection on many of his proposed policies, but his energy plan will enjoy broad support.” For instance, building a wall with Mexico might not be an easy task and it might not be easy to work out modalities for deporting illegal immigrants. Nonetheless, Trump’s energy policy will most likely enjoy broad support in America.
OPEC strangely can’t agree to cut production
OPEC has been grappling with a supply glut and a resilient slowdown in demand for much of the last two years. This year, some OPEC member-nations started clamoring for the need to reduce their production in order to stem the supply glut. However, every one step towards cutting the production is often followed by one step sideways and three steps backward.
In October, OPEC member nations tentatively agreed on a deal to cut production – the said deal is due to be activated on November 20. However, last Friday (Nov.11) OPEC revealed that production climbed to a record high of 33.64 million barrels per day (bpd) in October. Now, the global supply glut will most likely continue through 2017 before any production cut could have any material effect on global oil prices.
David Hufton of PVM Oil Associates observes that “OPEC are facing insurmountable problems to which the election of Donald Trump… OPEC know what needs to be done but too few members will agree to take the production pain for the price gain, knowing also that the price gain incentivizes non-OPEC to produce more, lengthening the rebalancing process.”
The Oil market is already feeling the heat
On Monday (Nov. 14) crude oil fell lowest level in three months in response to the fears of a sustained supply glut. Brent Crude fell $1.18 to a session low of $43.57 to mark the lowest point since August 11. U.S crude futures also crashed to a session low of $42.20 to mark the lowest price since August 11.
However, oil prices climbed higher in morning trade on Tuesday (Nov. 15) to erase the multi-year lows of the previous session. U.S. Crude futures for December delivery managed to gain $0.90 or 2.1% to $44.22 per barrel as at 0340GMT. More so, Brent Crude for January delivery was up $0.81 or 1.9% to $45.24 per barrel.
The main reason behind Tuesday’s gain is the increased expectation that U.S. shale oil production might crash in December. The EIA has revealed that U.S. shale oil production might fall to 4.5 million barrels per day (bpd) to mark the lowest level since April 2014. If U.S. Shale oil production falls as forecasted, commodity traders might expect to see a sustained rally in oil. However, you can expect the bearish thesis in oil to continue if the forecasted fall in production doesn’t materialize.
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