Oil Market Report November, 2016

So Real Estate Billionaire, Reality TV Star and all-round Vulgarian Donald Trump now holds the keys to the White House. As things stand, stripping out the real intent of the new President from the spin and vitriol is clearly difficult. But when it comes to energy, Trump is clearly pro-oil and pro-domestic production – both of which could significantly change the global oil & gas landscape.

On the campaign trail, the new President frequently expressed his desire to free up oil exploration, production and transportation from red tape. Therefore the US oil industry should soon be enjoying a period of deregulation, reduced environmental scrutiny and lower taxation. Obama’s drilling moratoriums on Federal Lands will be rescinded, new permits will likely be issued for exploration in the Arctic Circle and the long debated Keystone XL pipeline (bringing tar sands from Canada to the US) will finally be given the green light. And with the likely appointee of a shale billionaire (Harold Hamm of Continental Resources) as US Energy Secretary, one imagines that these actions will be smoothed through with relative ease. All of which reads like some kind of nightmare hit-list for environmental groups – although from that perspective, worse will probably come when the plug is pulled on America’s involvement in COP 21 (the Paris Climate Change Agreement). None of which should come as any surprise, when you consider that Trump has variously referred to Climate Change as “just weather” or “a hoax invented by the Chinese”.

And things will get better still for the US oil industry, when alongside the freeing up of oil production, Trump’s promised national infrastructure programme kicks in (albeit not one that includes a 2,000 mile wall between the USA and Mexico). How such a large public building programme will be funded by an Administration committed to both reducing tax and the $16tn national debt is open to question, but neither investors nor oil producers will be worrying about that too much if and when the projects start. Let’s face it, big infrastructure projects mean big money and big energy consumption.

So for every pang of horror expressed by the environmentalist, there is going to be a parallel whoop of joy from the US Oil (Wo)Men. Not only are restrictions on production going to be removed, but demand is also going to go up…and on the doorstep! But boomtime growth tends to lead to inflation and the Fed will be keen to cool this one off with the raising of interest rates. This in turn will make it difficult for the heavily indebted shale oil producers to refinance and many may not survive long enough to enjoy the good times. Another alternative (and albeit neo-liberal) negative view is that Trump’s desire to rip up international trade agreements will force the global economy into recession and with that, any domestic US growth will be offset by a downturn in global consumption.

Finally, international Trumpolicy promises to be equally unflinching. The “sacred cow” that was once Saudi Arabia has been told that their oil will be boycotted unless the Kingdom contributes troops in the fight against ISIS. And even more combustible is the new President’s “No 1 priority” of dismantling the “disastrous [nuclear] deal with Iran”. Quite frankly, this would have a massive upward effect on oil prices, particularly if it was coupled with the reintroduction of sanctions. Such a move would again benefit US producers, but US consumers form the other part of this equation and they – along with the overall US economy – will react badly to price rises. Which means a full-on repeal of the Iranian Nuclear Agreement is unlikely – another “post-truth” election promise to add to the collection. That being said, we should expect a far more hawkish approach from the USA in the monitoring of the deal and closer scrutiny at ground level, both of which will be no bad thing.

The oil markets in 2016 were already exciting enough, but Trump’s arrival has further raised the stakes. To say it provides a fascinating backdrop to this week’s decisive OPEC meeting is a huge understatement and there can be no doubt that aggressive US oil policies will be causing huge consternation amongst certain OPEC members. As a result, the outcome of the Vienna meeting has now become too difficult to call. US sentiment on Iran may even embolden Saudi Arabia to back away from production cuts entirely, concluding that new Iranian sanctions will have the same (desired) upward impact on prices. Such a massive u-turn by OPEC’s largest member could even signal the end of the cartel as a meaningful entity. Trump is certainly the wild card on this one, but will he be the trump card?