OPEC Deal Becomes More Urgent

OPEC was already struggling to finalize a deal on production cuts this month. And then Donald Trump was elected President of the U.S.

The Organization of Petroleum Exporting Countries faces increasing urgency to take measures that will support oil prices as Trump’s surprise victory threatens to deepen a market sell-off, said UBS Group AG. Yet the uncertainty arising from the President-Elect’s policies — from climate change to the U.S. shale industry and sanctions on Iran — will make resolving differences between producers even harder.

“The pressure on OPEC to come up with a deal only increases in the wake of Trump’s victory,” said Giovanni Staunovo, an analyst at UBS in Zurich. “Even though the oil market is rebalancing, the political uncertainty in the short term leaves oil prices vulnerable to downside, that makes it more urgent for OPEC to act.”

Oil prices had already retreated about 15 percent since October on growing doubts that OPEC could finalize the Algiers accord at its Nov. 30 meeting amid a refusal to cut output from almost a third of its members. U.S. crude initially slumped to near $43 a barrel in New York on Wednesday after Trump, a real-estate mogul and reality-television star, was elected, but later erased losses as a global selloff of risky assets abated.

Bearish Policies

Trump’s various policy positions could either support or weaken oil prices, making it more complicated for OPEC to conclude a deal, said David Hufton, chief executive officer of brokers PVM Group Ltd. in London.

“There’s a bit of fog coming down — it just adds a bit more uncertainty, for OPEC and everybody else,” Hufton said.

The result could be “bearish for the emerging markets, which drive oil-demand growth” because Trump has vowed to scrap international trade agreements in Latin America and Asia, according to consultant FGE.

His surprise win could also weaken prices by aiding a revival in U.S. shale oil production. Harold Hamm, the chief executive officer of Continental Resources Inc. who has advised Trump on energy policy, is “solidly pro-domestic oil and gas development,” FGE said.

“Trump means more U.S. domestic energy production,” said Adam Ritchie, founder of consultant AR Oil Consulting. “Plus a more inward-looking and protectionist U.S. is bad for economic growth globally, so less oil demand.”

Bullish Moves

On the other hand, the next U.S. president is likely to treat climate change agreements “skeptically” and moves towards limiting carbon dioxide output are “likely to slow or reverse,” potentially boosting demand for fossil fuels, according to FGE.

“Global climate treaties are clearly at risk,” said Bjarne Schieldrop, chief commodities analyst at SEB AB bank in Oslo. “Removing restrictions on emissions actually means removing restrictions on the consumption of fossil fuels. This means more gas guzzling cars and more oil demand.”

Trump has also said he would undo last year’s nuclear accord with Iran, potentially reversing increases in the Islamic Republic’s oil exports, said RBC Capital Markets.

Equally, Trump’s election may have little impact on either the market or OPEC’s negotiations, said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. The new president won’t take office until January, and any new policies will first need to be approved by Congress, he said.

Black Box

“The pressure to reach a deal was there ahead of the U.S. presidential election,” Tchilinguirian said. “The outcome of the race doesn’t change that.”
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OPEC aims to finalize how much each member should reduce output after agreeing in principle to a joint cut to between 32.5 million and 33 million barrels a day in September. The accord already faced a number of hurdles, with key producers including Iran and Iraq arguing they should be exempt because of their production losses in recent years from war and sanctions. Both have disputed the output estimates OPEC intends to use as the basis for any accord.
Given all the ways a Trump administration could complicate OPEC’s policy, the organization needs to “act decisively and urgently,” said Dewardic McNeal, managing director at consultant Longview Global LLC in Washington.

“The Trump Administration is a huge black box for many analysts on every subject area,” said McNeal. “One would suggest that OPEC not delay tough decisions for some future date.”

Bloomberg

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell