Analysis
Oil is not immune to
Trump
While the election of Donald Trump as US president and the Brexit vote
have been a central focus for bond, currency and equity markets over the
last 6 months, oil markets have instead concentrated on OPEC as the key
price driver.
However, there are good reasons for the oil market to pay greater
attention to Trump in particular.
Firstly Donald Trump has been a vocal critic of the deal reached
between Iran and the UN Security Council over the Iranian nuclear
programme, after a satisfactory report by the International Atomic
Energy Agency in January 2016. In his inimitable style Trump told a pro-
Israeli lobbying group that “My number one priority is to dismantle the
disastrous deal with Iran.”
Cancelling this deal would upset various international partners
involved in the painstaking process of the deal’s negotiation, including
Trump’s great friend Mr Putin.
There are critics of the deal in Iran too; the supreme leader, Ayatollah
Ali Khamenei, said the agreement “once again proved the pointlessness of
negotiating with the Americans.”
The Iranian election on 19th May poses another threat to the deal. It
is not yet clear if Hassan Rouhani, the current president, will seek a second
term, and there is a risk that a hard line candidate may prevail in any case.
With Trump installed as US president, this danger could be increased
by bellicose rhetoric directed at Iran from the White House, which in turn
could impact on a historically belligerent public in Iran when it comes
to the vote. Clearly an end to the Iranian deal and a reintroduction of
sanctions could put significant upward pressure on oil prices.
Trump does seem to be supportive of US domestic producers. Much
has been made of Trump’s connections with the US oil industry, and
particularly his appointment of Exxon Mobil’s Rex Tillerson as secretary of
state.
The so called border-tax adjustment is part of a Republican plan to
reduce corporation tax from 35 to 20%, where the adjustment taxes
corporates on importing goods, but not exporting them.
Where oil is concerned, this will incentivise US refiners to use
domestic rather than imported foreign crude, while domestic producers
can continue to export crude without being taxed. In combination with
hobbling Iran by ditching the nuclear deal, this would fit in very well with
Trump’s protectionist agenda.
One of the most surprising consequences of Donald Trump’s election
has been the enthusiastic rally in stock markets, on the prospect of
expansionist economic and fiscal policies. The move higher in oil at the
end of last year occurred in sympathy with equity markets and, investors
may become more interested in oil as they decide how to allocate
investments in 2017.
Unfortunately, attempting to predict all price movements in 2017 will
be a much more complicated business than simply focusing on whether
OPEC members comply with cuts or not.
Callum MacPherson, head of commodities, Investec
20 Fuel Oil News | February 2017