From Nick Cunningham: The global financial markets began to crash last night as a Trump victory became more likely, although they regained ground as the results started to clear up. Nevertheless, to say that there is a lot of uncertainty about what happens next is a massive understatement.
Asian markets plunged, commodity prices fell, and emerging market currencies took a hit. The Mexican peso dropped more than 13 percent immediately following the news of a Trump victory.
For oil, there is no shortage of variables that will influence prices in the days and weeks ahead. But here are a few things to think about while everyone continues to digest the ramifications of a Trump administration.
The uncertainty surrounding Trump’s approach to the economy and global trade has rattled financial markets. Investors are clearly worried that his policies could destabilize already tepid growth rates, which would cut into oil consumption. “The outcome of the U.S. election adds to the challenges for the oil exporters because it will likely lead to weaker economic growth in an already fragile global economy. And that means additional pressure on oil demand,” oil historian Daniel Yergin told Reuters. One OPEC source put it more bluntly. “Oil is doomed,” an OPEC source told Reuters.
It won’t be just oil that is at risk. A wide variety of commodities could slump if investors balk at Trump’s efforts to roll back trade agreements. “His protectionism is clearly bad for the economy and that hurts demand for commodities,” Neil Williams, chief economist at Hermès Investment Management, told the WSJ.
Trump’s victory also puts a dent in the chances of a December rate hike by the U.S. Fed, as stock volatility could cause the Fed to wait on further monetary tightening. A weaker dollarwould help push up oil prices. On the other hand, Trump has criticized the Fed’s effort at keeping interest rates low, and the WSJ speculates that when Fed Chair Janet Yellen’s term is up in 2018, Trump could appoint a monetary hawk. That would lead to higher interest rates and a stronger dollar, which would put some downward pressure on crude prices. But that is just speculation, and the Fed’s longer-term policies will have to be addressed another day.
More central to oil markets is what Trump will do for domestic drillers. He certainly has intimated that he would be a friend to oil and gas, and that could lead to an opening up for drilling on a much wider swathe of public lands. He would seemingly be amendable to drilling in the Atlantic and Arctic Oceans, something that the industry has struggled with under the Obama administration. He would also be open to scrapping pending regulations on hydraulic fracturing and methane emissions, both top regulatory priorities for oil executives.
Oil projects require investment and lead times, so Trump’s triumph won’t automatically lead to higher production volumes from the U.S. But he could help boost output somewhere down the line. He will also be a friend to the midstream sector, which has run into increasingly stiff environmental opposition lately. He said that he would bring back the Keystone XL pipeline and since he is reported to have personal investment at stake in the Dakota Access Pipeline, one would assume he would be accommodating on that issue. In short, more pipelines could be constructed under Trump. “In relative terms, the oil and gas industry is a clear winner with the new president. Pipeline players and suppliers first, then all shale players, followed by the conventional ones” Alexandre Andlauer, head of oil and gas at Alphavalue, told the WSJ. “U.S. oil companies have a better future today than yesterday.”
Over at the EPA, he is widely thought to staff the agency with oil-friendly free-market types. That could lead to a cancelling of the Clean Power Plan and other regulations on coal production and coal mining. He will face a tough task in reviving the coal industry altogether, which has been in long-term decline, but he could certainly breathe new life into coal by shedding any semblance of environmental oversight on the industry. Trump has suggested that he would even want to kill off the EPA – the broader fossil fuel industry will be overjoyed to see the power of environmental regulators diminished.
One thing to worry about is U.S.-Iranian relations. Trump promised to scrap the 2015 nuclear agreement with Iran and take a hard line approach with Tehran. Any ratcheting up of tensions with Iran would be an enormous uncertainty for oil prices. Needless to say, greater friction between the U.S. and the Middle East could slap a risk premium onto oil. French oil giant Total just signed a deal with Iran to boost gas production at the South Pars field. If the U.S. tries to bring back sanctions, projects like that could be a risk.
Then there are some longer-term ramifications to ponder. Trump promised to “cancel” the Paris Climate Accord. While he can’t actually do that, he can simply not adhere to U.S. commitments. Trump wants to end public spending on renewable energy, some of which will require an act of Congress. But with control of both the House and Senate, that is conceivable. The production tax credit, which subsidizes wind and solar, is something that could be on the chopping block, perhaps as part of a broader tax reform bill. Still, the Democrats will put up resistance in the Senate, so legislative changes will be more difficult for Trump than executive actions.
He could also weaken fuel economy standards for the U.S. vehicle fleet. Some automakers have already locked in some of the fuel efficiency gains from Obama-era policies, but the much tighter requirements for vehicles to be manufactured in the model years 2017-2025, which will require 54.5 miles per gallon by the end of that period, are up in the air under a Trump administration. Rolling back efforts to deal with climate change could mean a much greater dependence on oil, and higher demand will lead to higher prices. It will also mean a warmer world could be ahead of us.
In short, oil and gas are potentially huge winners from Tuesday’s results. But all of this is just guesswork. Trump has been notoriously vague on policy details, so we will just have to wait and see.
The United States Oil Fund LP ETF (NYSE:USO) fell $0.06 (-0.58%) to $10.22 per share in premarket trading Thursday. Year-to-date, the largest fund tied to the price of WTI crude oil has plunged 6.55%.
This article is brought to you courtesy of OilPrice.com.