Market Report Week 46 - 12.11.2024

First, a stronger US dollar is negative for oil. The US dollar and oil prices are often negatively correlated because oil is globally priced in US dollars. When the dollar strengthens, oil becomes more expensive in other currencies, potentially reducing demand and putting downward pressure on oil prices. Conversely, a weaker dollar makes oil cheaper in other currencies, boosting demand and increasing prices. Additionally, investors may view commodities like oil as a hedge against dollar weakness, increasing speculative investment in oil futures when the dollar declines.
However, this time, the stronger US dollar is due to the expected strong performance of the US economy, notably as fiscal easing boosts the economy. Hence, the growth effect might mitigate some of the anticipated impacts of the stronger US dollar. Higher tariffs pose a clear risk to the outlook for global growth.
Secondly, US oil companies might respond cautiously to Trump's "drill baby drill" mantra due to concerns over global overproduction and low oil prices. Having previously suffered from price crashes, such as in 2014-15, caused by oversupply and OPEC adding supply, energy companies are wary of ramping up production solely based on political encouragement.
OPEC+ plans to increase supply, and though we do not expect the supply to arrive as announced, it is a latent threat to prices. Furthermore, weak demand from China already signals a challenging market ahead.
Hence, excess supply risks may discourage US oil companies from boosting output despite Trump's backing. Additionally, US producers face higher breakeven costs than OPEC members, making them less competitive if prices drop. Consequently, oil companies may prioritise efficiency improvements and shareholder return over new large-scale projects. In that respect, the OPEC+ plans to add more oil may negatively affect oil investment appetite in the US.
That said, on the margin, Trump’s policy of deregulation, tax cuts, and plans to allow more drilling on federal land do point to continued growth in US oil production over the coming years. Hence, the strong US crude oil production trend initiated under Obama will continue in the coming years. Any impacts from Trump’s new policies will mainly be seen in 2026 and beyond.

The new Trump administration might impact the geopolitical premium in the oil market. The impact primarily goes through sanctions.  Iran: We anticipate that Trump will intensify sanctions to support Israel. Notably, a significant portion of Iranian exports is directed to China; therefore, stricter sanctions on Iran would primarily impact China. However, imposing sanctions on Iranian oil today may be more challenging than it was six years ago when Trump initially implemented stringent measures against Iran. We would expect that effective sanctions would be able to reduce 0.5 to 1.0 mb/d of exports currently running above 1.5 mb/d.  Venezuela: We do not expect any major changes, especially considering that US-based Chevron is actively involved in Venezuela's oil production through joint ventures with the state-owned oil company Petróleos de Venezuela, S.A. (PDVSA). Russia: Trump has stated his intention to end the Russian war in Ukraine. The specifics of a potential peace solution remain unclear, including whether Ukraine or Russia would accept any agreement. Notably, Russian oil will likely remain sanctioned in the EU for an extended period. Additionally, Russian crude oil production is constrained by its OPEC+ membership, leaving little room for expansion. If Russia will not enter a peace solution, further sanctions on Russia might also be in play.