Oil Moves: OPEC and Trump

Oil has rallied 4% today on the back of renewed hope that OPEC will come to a production deal at their Vienna meeting at the end of the month.  WTI futures have broken back above $45 after reaching 3 month lows yesterday.

OPEC had agreed an outline to a deal in September, the details of which have not been announced or fully agreed upon and negotiations have been difficult according to officials. Initial talks of a deal had seen Oil rally up to $52 in October, but as people began to doubt OPEC’s ability to make a deal, it fell nearly $10 to $42.20. The stronger dollar has also played a part in commodity weakness recently, with the dollar index trading over 100 right now, if it goes above 100.51, it will be trading at 13 year highs. This Dollar strength in reaction to a Trump Presidency is at odds with what was predicted for the dollar prior to the shock result.

Optimistic comments from Saudi Arabia overnight have sparked the rally today. There are still divisions amongst OPEC members on cuts, but supposedly, the gap between the Saudi and Iraq and Iran is narrowing. With Iraq and Iran considering restraining production, something that had seemed unlikely until recently. Saudi Arabia has said it is imperative that a deal is reached and Qatar, Algeria and Venezuela are said to be leading a diplomatic push to help. However, all this is coming at a time when OPEC Oil production has reached a record high of 33.64 million barrels a day. This could be a sign that knowing there will be cuts coming; member states are trying to boost profit for one final month, highlighting the fragile nature of OPEC. The cuts are said to be targeting a 32.5-33 million barrels a day as a target. This may not be enough to cause a significant rally in Oil even if the deal is reached.

Trump’s election has seemingly caused dollar strength, but Trump could have a far greater impact on Oil. During his campaign, one policy he mentioned was ‘an America first energy plan.’ “America’s incredible energy potential remains untapped. It is a totally self-inflicted wound. Under my presidency, we will accomplish complete American energy independence,” he said. He wants to wean America off a reliance on Oil from Oil cartels and potential foes, to prevent them holding it over America as a weapon. He also believes that lifting restrictions on the American energy industry would boost growth and tax revenue, although he did not expand on what these restrictions are. Furthermore, domestic price rises would spark renewed investment and drilling operations for Oil, which have been depressed in the last two years of falling Oil prices.

Currently, just 8.5 of the 20 million barrels that America consumes a day are domestically produced. Imports from OPEC make up 3 to 3.5 million of that, Canada being the largest exporter to America with around 4 million. Blocking imports from OPEC would have a detrimental impact on fuel prices in America, although some see that as an acceptable price to pay, to reduce exposure to future supply and price shocks.

Picture courtesy of Richard Masoner, via flickr

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Reuters: Business News