Trump and the puzzle of oil prices

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Trump and the puzzle of oil prices

Cong Minh Nguyen

28/11/2018

 

Recently, Donald Trump celebrated the collapse in oil prices that started in early October:

Trump cheered his optimism from a fall in U.S net imports of oil this summer U.S. to under 2 million barrels per day:

“Oil Prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”

           Trump’s tweet

This article will analyse how Donald Trump’s actions contributed to the plunge in oil prices, but turn a blind spot on inherent costs. In general, lower oil prices has its own cost of increasingly suspicion against U.S from Saudi Arabia, softened sanctions on Israel and especially losing momentum for the growth of U.S. oil producers. Then, I will suggest alternatives for investors in the energy sector.

 

Trump’s Effect on Oil Prices:

China halted imports on U.S. oil, after the U.S. president’s declaration of a trade war. Significantly, it is worth noting that over half a million barrels of U.S oil had been shipped daily to China1. Such a loss of market will definitely do harm to U.S. oil producers. This summer U.S. net imports decreases to under 2 million barrels a day, and there is  a clear trajectory to reach zero in a few years. However, this can be reversed by Trump’s policies 1.

Furthermore, by planning to place sanctions on Iran, and further cut off their oil exports, Saudi Arabia is forced by Trump to pump oil to offset the predicted lost exports of Iran. Contradictory, before sanctions being implemented, the US President, however, announced to give waivers to countries, including China, to keep their imports of Iranian oil1. This significant impact most certainly helped contribute towards the collapse of oil prices due to continuing excess supply.

 

Adverse results:

Logically, Trump’s tariff will eventually appeal manufacturing to return to the U.S by lower cost of production resulting from lower energy costs. Conversely, this also means higher commodity prices for U.S. consumers.

Furthermore, the logic is also inconsistent with Trump’s view on oil prices. Following the logic above, higher oil prices will be attractive to U.S oil producers by weakening their reliance on foreign oil. Conversely, Trump is undermining the country’s oil industry in terms of its potential to marginalise Saudi Arabia’s dominance. Clearly, the focus of Trump’s policies is then to compromise with outsiders rather than build on the U.S’ core strength.

 

Details of how low oil prices harm the U.S. Oil Industry:

The US decision to grant waivers surprised Saudi Arabia. Clearly, the country is pumping too much oil into the market, driving down oil prices. However, this can be only short-term depending on Saudi Arabia’s plan to collude with other countries to significantly cut production.

Donald Trump may foresee that future, resulting in his attempts to pacify Saudi Arabia, passing on the October murder of Jamal Khashoggi, the dissident journalist, and tweeting a ‘Thank You’ on Twitter as shown1. However, it is hard to see that this will be enough to offset his betrayal to Saudi Arabia in Iran, which certainly means billions of lost in sales.

 

How the U.S stock reacts:

The 25% decrease in oil prices from its high of $86/barrel in October as shown deepens worries about U.S’ influence in the global oil market2. This is symbolised by decreases of 0.26% and 0.12% in the Dow Jones Industrial Average (DJIA) and the S&P 500 index (SPX) respectively on Tuesday and worsening the Nasdaq Composite Index’s slide of at least 10% from its recent high4.

 

An alternative investment in the energy sector?

Interestingly, after the plunge in oil prices, the associated Permian gas production in Texas as the second biggest U.S. gas field shows no sign of slowing down. Both Nexus and Rover lines are also reaching their full capacities of pipelines. For the first time, LNG feed-gas also increases to be over 4 billion cubic feet per day (Bcf/d.) The Energy Information Administration (EIA) asserts its 2019 forecast for non-stop growing production to hit closer to 90 Bcf/d compared to 85 Bcf/d a few months ago. Simultaneously, positivity also comes from the demand side when the year-to-date demand reaches 85 Bcf/d this year, compared to solely the 77 Bcf/d in 20173.

Certainly, natural gas has been undervalued, and its price will rise even further as winter is coming due to rising demand for heating. Indeed, its price is up 17% after the first 12 days of November. This means, “if winter is getting colder, the storage deficit for gas could be exposed and prices could reach levels not seen in years.”3

Overall, US natural gas then presents new investment opportunities with greater certainty and dynamism compared to the puzzle of the oil industry suffering from the chaos of Trump’s foreign policies.

 

Bibliography:

[1] Rapier, R. (2018). President Trump’s Blind Spot On Oil Prices. [online] Forbes. Available at: https://www.forbes.com/sites/rrapier/2018/11/22/president-trumps-blind-spot-on-oil-prices/#3e0865558a4c [Accessed 23 Nov. 2018].

[2] Ft.com. (2018). Oil’s ‘lower for longer’ reasserts itself | Financial Times. [online] Available at: https://www.ft.com/content/507b6dce-ed75-11e8-89c8-d36339d835c0 [Accessed 23 Nov. 2018].

[3] Clemente, J. (2018). The Pre-Winter Rapid Rise in U.S. Natural Gas Prices. [online] Forbes. Available at: https://www.forbes.com/sites/judeclemente/2018/11/12/the-pre-winter-rapid-rise-in-u-s-natural-gas-prices/#2d3244a327f8 [Accessed 23 Nov. 2018].

[4] DeCambre, M. (2018). Trump thanks Saudis for $54 oil, but says in Wednesday tweet, ‘let’s go lower’. [online] MarketWatch. Available at: https://www.marketwatch.com/story/trump-thanks-saudis-for-54-oil-but-says-in-wednesday-tweet-lets-go-lower-2018-11-21 [Accessed 23 Nov. 2018].

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