By The oil market is expected to remain on the edge in the coming months after Donald Trump took charge as the US president on Monday.
Oil prices fell sharply on Tuesday as Trump plans to boost oil and gas production in the US, while also imposing tariffs later than previously anticipated.
The US dollar’s rise on Tuesday also weighed on prices. A stronger dollar makes commodities priced in the greenback more expensive for overseas buyers.
At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $75.41 per barrel, down 2.6%. Brent crude on the Intercontinental Exchange was 1.7% lower at $78.83 per barrel.
David Morrison, senior market analyst at Trade Nation, said:
Mr Trump’s full-throated yell for US producers to: ‘Drill, baby, drill!’ is not new. And it’s perfectly logical that prices should fall at the prospect of increased supply.
Oil production latest
During his inauguration speech on Monday, Trump declared a ‘national energy emergency’ to initiate measures to boost oil and gas production in the US.
The prospect of more production weighed on sentiments as the US is already producing oil at a record level.
According to the US Energy Information Administration, oil production in the country averaged 13.481 million barrels per day in the week ending January 10. This is around record levels, and production is expected to average more than 13.5 million barrels per day this year, according to EIA.
Trump also said that oil reserves in the US are to be fully restored. This is about the US’s Strategic Petroleum Reserve, which stores oil to guard against any supply shocks.
After Russia invaded Ukraine in 2022, oil prices had surged to unprecedented levels. This prompted former US President Joe Biden to authorize the sale of 180 million barrels of oil from the SPR to cool down domestic fuel prices.
However, analysts expect Trump’s decisions to have their full effect much later.
“Visible effects of the announced measures on production are not expected until 2026, if at all,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
“But producers are highly price-sensitive, and there comes a time/price where it’s uneconomical to raise production,” Morrison said.
Tariffs on Canada and Mexico from February
It was announced last night that Trump intends to introduce a 25% tariff on imports from Canada and Mexico from 1 February.
“If this also affects crude oil, around 4.5 million barrels or almost 70% of daily US crude oil imports would become significantly more expensive suddenly,” Fritsch said.
The oil market viewed this decision as a negative for prices as previously, these sanctions were expected to be rolled out on Trump’s first day in office.
Nevertheless, if the sanctions against Canada and Mexico are implemented next month, it is expected to create a shortage for US refineries.
“It is impossible to source this volume elsewhere in the short term, especially as the oil from Canada and Mexico is urgently needed by US refineries due to its special characteristics (density, sulphur content) and cannot be replaced by light US shale oil,” according to Fritsch.
In such a scenario, the tariff increases and increased cost of imports from Canada and Mexico would be passed down to US consumers through higher gasoline and diesel prices.
Fritsch added:
It can therefore be assumed that the tariff threat is more likely to be used to gain concessions in negotiations with Canada and Mexico on other issues such as border controls against illegal immigration.
Trump also wants to end oil imports from Venezuela, which amounted to 220,000 barrels per day last year. Oil from Venezuela has similar characteristics to Canada and Mexico.
Sanctions against Iran and Russia may boost oil prices
Additionally, the impact of the Biden administration’s recent sanctions against Russia on Trump’s actions will be intriguing to observe.
Brent and WTI oil prices have risen to their highest levels in six months as a direct result of these sanctions, which have significantly increased oil prices over the past week.
This should make Trump cautious about implementing the sanctions, as a further price increase is unlikely to be in his interests. “After all, low energy prices are of great importance for his economic policy agenda,” Fritsch noted.
Experts believe that Trump may use these sanctions against Russia as a bargaining chip to force Moscow to end the war against Ukraine.
Further sanctions against Iran are expected; however, the Biden administration had already tightened restrictions against Iran before the end of its term.
Sanctions were imposed on Iran’s shadow fleet in December. This could impact a third of Iranian oil exports, equating to 500 thousand barrels per day, as per the International Energy Agency.
Fritsch said:
Due to the price increase and the widening of price differentials at the front end of the forward curve, the market has already anticipated a tightening of the oil supply as a result of the sanctions against Russia and Iran.
“Nevertheless, a further price increase is to be expected if sanctions are tightened.”
The post Analysis: will the oil market stay on edge as Trump takes office? appeared first on Invezz
