Even more significantly oil and gas are, of course, global
commodities and prices are set globally based not only on supply but
also demand. Note how even OPEC+, which still has around a 50 percent
share of the global market, has been unable to sustain the price of
Brent crude above US$75 per barrel (pb) this year despite its voluntary cuts
in output, the ratcheting back of which has (again) been postponed.
With all due respect to Citi’s analysts, their hope that Mr Trump could
persuade the cartel to taper its production cuts more quickly is surely
no more than wishful thinking.
Nevertheless the Trump Administration has at least four other options
which could, by design or inadvertently, encourage a slide in the oil
price globally. Consider:
- Easing US sanctions on Russian energy exports, for which Vladimir Putin is angling, would boost supply in theory at least despite the efforts of the ‘dark fleet’.
Mr Trump’s love of a deal could encourage him down this track as part
of a package to end the Russia/Ukraine conflict (even though I doubt he
could secure anything more than a ‘time out’). We can reasonably assume
that some EU members, notably Germany, would be anxious to jump on this
particular bandwagon.
- Mr Trump could renege on his promise of “maximum pressure” on Iran through ramped up sanctions. However, I very much doubt that he would do so.
- Rather, he could decide/be persuaded that the best way to end the
current conflict would be to join Israel in bombing Iran’s nuclear
facilities. As Bill Law and Jon Hoffman discussed in last week’s
podcast, this would also go down well with the president-elect’s white
evangelical base. Furthermore, if the US did not come to Israel’s aid,
Benjamin Netanyahu, who recently described preventing Iran from
acquiring nuclear weapons as his “supreme objective” and whom some
believe to be determined on regime change in Tehran, might go ahead
anyway, meaning a more protracted conflict than would otherwise be the
case and a lower probability of success. Although investors have been
remarkably relaxed about supply side risk throughout the conflict, this
scenario could see Brent heading towards, or even through, US$100pb as I
argued in the 28 October Newsletter. However,
any spike would likely be short-lived if the US were directly engaged;
and a successful campaign could be worth US$3-5pb off the current price
of Brent (i.e. US$74pb) as perceived political risk across the region
eased.
- All this being said, the biggest relevant ‘known unknown’ is how
far Mr Trump will proceed on tariffs. A 60 percent tariff on imports
from China and 10-20 percent on the EU (and others) would constitute a
major ‘hit’
to the global economy and, therefore, demand for oil. There will
undoubtedly be a debate within the Administration over how best to use
tariffs. However, using tariffs to address the US trade deficit is one
issue on which Mr Trump has been consistent since the 1980s.
Furthermore, that Mr Trump has asked his former US Trade Representative
Robert Lighthizer, a true believer, to take up this portfolio again
suggests that he wants to see a maximalist approach from day one. As The Economist
pointed out on 7 November, markets are already nervous that the
“promised trade war with China will be a drag on oil prices (Brent crude
briefly fell by more than 2% the day after Mr Trump‘s election)”.
Pulling all this together, I think the Peterson Institute’s Cullen Hendrix
is correct to argue that trying to push energy prices down through
increased US production “might work over the short-term (and that’s
still doubtful), but over the medium and longer terms markets would
adjust accordingly.” This being said, a combination of OPEC+ ratcheting
back on its cuts in 2025Q1, China’s continuing failure
to come up with a convincing (demand side) economic stimulus, easing
perceived political risk and trade wars could see Mr Trump able to
declare a modest victory of sorts by around this time next year…ceteris paribus!
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