OPEC countries have been struggling to come to a conclusion regarding the oil price problem and this month's OPEC meeting in Algiers was expected to finally yield some results. However, yesterday's surprise election of Donald Trump might turn everything upside down.
Oil prices have already dropped by 15% since the beginning of October thanks to investors' doubts that OPEC countries could come to any meaningful conclusion at Algiers meeting, considering that roughly a third of OPEC members opposed the decision to limit the oil output. Tuesday night, when Trump's lead over Clinton became obvious, U.S. crude oil (COMEX: XTI/USD) dropped 4% to about $43 per barrel whereas Brent (NYMEX: XBR/USD) lost 1.37% to $45.41 as a reaction to the unexpected election outcome.
This reaction was part of investors' "panic" reaction to election results when they rushed to retreat to safe-haven assets like gold (NASDAQ: Randgold Resources [GOLD]) while oil stocks lost favour. However, in some hours, oil slightly recovered with Brent gaining 0.7% to $46.36 per barrel and crude oil growing 0.6% to settle at $45.27 a barrel as the panic-induced sell-off of risky assets slowed down, reports Reuters.
"If you just look at today's close versus yesterday's close, not that much happened. But, there was a near $2 a barrel roller coaster ride in the middle," an energy consultant James Williams told Reuters.
But what impact to expect from Trump's presidency on the oil market? Interestingly, most of the analysts agree that investors should prepare for volatility as Trump's policy proposals towards the energy sector are quite contradictory, what can bring both a significant uptick in the struggling industry or, even more likely, to bury it even deeper. Oil is still trading at less than half of its 2014 level and the biggest oil producers such as Russia and OPEC have been discussing the option of freezing the record-high outputs as a way to compensate for a constantly weakening oil demand that is dragging the oil price down.
With this in mind, the experts have split up in two "camps", with some of them expecting a more positive influence of Trump's presidency whereas others say that he would only bring more uncertainty to the market and deepen the conflicts between the key oil producers. First of all, Trump had a very strong stance on the future of the energy industry in the United States promising to soften regulations on oil and gas production that are currently in place in the country and generally boost the energy sector. According to Upstream, Trump's policies went along the lines of supporting fossil fuel production as the main driver of the American job creation as well as starting on the development of Keystone XL pipeline among others. In addition to that, Trump also pledged to open all land and waters in the United States for fossil fuel exploration to kickstart the production.
These bold promises have distressed environmental protectors but pleased the energy companies expecting a boost in U.S. domestic fossil fuels production. Another important factor that analysts believe could be beneficial for the oil prices is Trump's negative stance against the nuclear deal. The president-elect has repeatedly criticized the American government for securing a nuclear accord with Iran that allowed the country to dramatically increase its oil exports this year. In case he would go as far as to revoke the agreement with Iran, this could cause a conflict in the oil market but an increase in the oil price due to the cut of oil output of Iran.
"It remains to be seen whether U.S. President Trump will revoke the nuclear agreement with Iran that he has criticized so strongly. If so, oil prices would presumably rise," German Commerzbank wrote in a note, as reported by Reuters.
OPEC's clock is ticking
However, these are the only points that analysts see as supportive of the oil price. On the other hand, Trump's passionate support of the energy industry could cause an even more challenging situation in the market, with the oil prices falling further down. According to the experts, the aforementioned policy plans of Trump, if fulfilled, would cause a major increase in the oil production in the United States, what is not exactly helpful for the already oversupplied oil market. Despite this danger, adds Reuters, American domestic oil and gas producers such as ExxonMobil (NYSE: Exxon Mobil Corporation [XOM]), Shell (NYSE: Royal Dutch Shell Class A [RDS.A]) and Chevron (NYSE: Chevron Corporation [CVX]) could see an increase in their share price.
Next to that, Trump's victory is likely to cause confusion in the markets and slowing down of the global economic growth due to his protectionist views on the U.S. This, in turn, would result in an even weaker demand for oil than before.
"Buckle up your seatbelts for a more turbulent and uncertain global economy that is ahead. 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," said an oil expert and a chairman of IHS Markit Daniel Yergin.
Therefore, Bloomberg adds that because of that confusion on the market, OPEC faces even higher responsibility and urgency to finally take action to support struggling oil prices as Trump's presidency might only worsen the situation because of the conflict with Iranian side. And November 30 meeting in Algier could be their last chance to do so before Trump's inauguration in January.
“The pressure on OPEC to come up with a deal only increases in the wake of Trump’s victory. 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," UBS analyst Giovanni Staunovo told Bloomberg.
Coal up, solar down
At yesterday's market opening after the historical election night, solar stocks were among the biggest losers as this sector would be the first on the list to suffer from Trump's pro-fossil fuels policy. Guggenheim Solar ETF (NAR: TAN) was down more than 5% yesterday morning with SunPower Corp. (NASDAQ: SPWR) falling whopping 13%, Sunrun (NASDAQ: RUN) losing almost 8%, Vivint Solar (NYSE: VSLR) going down 6.2% and First Solar Inc. (NASDAQ: First Solar [FSLR]) declining by 5.7%. This is not a surprise considering Trump's strong stance against climate change and alternative energy. His suggestion to open all lands and waters in the country for fossil exploration has definitely distressed environmental supporters.
The New York Times quoted Trump saying that human-caused climate change was a hoax created by the Chinese and he would do everything to revoke Obama's developed climate change policies, if elected. He also vowed for rejecting the 2015 Paris Agreement signed by almost all countries promising to reduce carbon dioxide emissions.
At the same time, coal stocks surged in the early trading yesterday on the news of Trump's victory. Peabody Energy Corp. (OTC: BTUUQ) was up more than 43%, Foresight Energy LP (NYSE: FELP) grew by 25.4% whereas Rhino Resource Partners LP (OTC: RHNO) and Westmoreland Resource Partners (NYSE: WMLP) jumped by about 20%.
Therefore, Trump's victory was generally welcomed by the energy stocks yesterday with oil prices quickly recovering from the initial shock. However, the uncertainty that comes with Trump's presidency will definitely not go unnoticed in the oil market and is likely to cause a prolonged turmoil.