Donald Trump's victory in the US Presidential election has been the greatest global disruption of the year, far surpassing the Brexit vote in the UK. The general consensus is that he is committed to the largest deficit spending campaign in decades, which has thrown markets into a massive realignment.
Two markets that will be the most affected by the shift in US policy are bonds and oil. With the global oil glut already keeping prices at historic lows, what does a Trump win mean for OPEC?
Mixed Bag of Mysteries
Analysts are unsure which of Trump's campaign promises were real, and which were designed to whip up enthusiasm among his supporters. On a scale of "make Mexico pay for the wall" to "massive infrastructure spending", his pledges of "rolling back environmental protections" and "opening Federal lands to coal and fracking" are probably two of the more likely goals to be implemented.
More problematic are the ideas of boycotting OPEC oil, or tearing up global trade deals. Any protectionist policies pursued by a Trump Administration, such as tariffs on imports or naming China a currency manipulator, are guaranteed to stunt global economic growth. Asia in particular will be damaged by any protectionist policies implemented by Trump, as most of their economy is focused on trade with the US.
Another mystery is to what extent Trump's foreign policy rhetoric will carry over into official US positions. New and tougher sanctions against Iran are practically a given, judging from his frequent attacks of the nuclear disarmament deal. This should choke off Iran's already limited access to the global financial system, curtailing its oil exports. While Saudi Arabia is on board with anything that hurts Iran, removing Iranian crude from the global market is a nice bonus.
There will likely be no reduction in the global oil glut, though, thanks to Trump's other likely foreign policy move. Trump has been open in his admiration of Vladimir Putin, so moves to reduce or remove sanctions against Russia for its invasion of Crimea would not be surprising. This would allow Russia greater access to global markets, which means more oil on the market.
Drill, Baby, Drill
The effects of these actions on global oil supply would be minor, compared to Trump's domestic energy policy. A goal he has restated since becoming President-elect is to move swiftly to remove environmental restrictions on fracking and drilling in the Arctic Ocean. His plans to open up all Federal land and the Atlantic continental shelf to drilling will have an even greater impact on US oil production.
These plans will doubtlessly be challenged in court, but with Trump appointing a new, conservative Justice to the US Supreme Court, the government will expect to win these suits.
OPEC's "Own Goal"
Many hopes and dreams have been pinned on efforts this summer by OPEC to forge an international agreement among global oil producers to reduce crude output. With global demand growth nearly non-existent, supply must be cut to eliminate the oversupply of oil and revive prices. Every scrap of rumor has been latched onto by desperate oil traders as an excuse to move prices higher, only to have those hopes dashed in short order.
Trump's election is only the latest setback in efforts to curtail global oil supplies. OPEC has already been scoring "own goals" while talking about production cuts. It was recently reported that OPEC as a whole pushed output 240,000 barrels a day higher last month, to a new record of 33.64 million barrels every day. The baseline goal of the production cut agreement was 32.5 to 33 million barrels a day.
Saudis Refuse To Be the Fall Guy Again
OPEC tried a production cut agreement in 1986, during a global oil glut that saw oil fall by more than half to $7 a barrel. The reality of that agreement was that everyone in OPEC cheated, except Saudi Arabia. The Saudis finally tired of taking one for the team, and flooded the market.
When the current oil crash began, late in 2014, oil officials of some of the smaller OPEC members have told the Saudi oil minister to his face that his country is "supposed" to cut output to prop prices up for everyone. The Saudis of course disagreed.
Is It Too Late For OPEC To Cut?
This brings us to the current situation: Trump's alliance with Big Oil, and support for large pipeline projects like Keystone XL and the Dakota Access, guarantee that oil production in the US (and Canada, thanks to KXL) will jump dramatically. Any move by OPEC and Russia to improve oil prices will immediately be seized upon by US shale operations to increase production.
Why it may seem counter-intuitive to encourage even higher production at a time when oil is at multi-year lows, those low oil prices are advantageous to Trump's overall plan. His planned spending spree on infrastructure and the US military will send government deficit spending skyrocketing, and push inflation higher. Super-low oil prices, however, are disinflationary.
This will further erode OPEC's influence. Control of the global oil market will shift to the US shale industry as the world's swing producer. And that's what a Trump win means for OPEC.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.