OPEC+ Tapering Mechanisms Will Continue To Dictate Oil Prices

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

More Info

Premium Content

• Wall Street has expressed concerns that Donald Trump’s election could impact the supply of the world’s largest crude producer.
• Citi: another Trump presidency could be net-bearish for oil.
• Standard Chartered: OPEC+ policies are set to have a large impact on oil markets in the mid-term.

Oil markets witnessed choppy trading in Wednesday’s session, with Brent crude for January delivery plunging to $73.53 per barrel at $8.40 am ET before jumping to $75.91 per barrel at 11.00 am ET after Donald Trump defeated Kamala Harris to clinch leadership of the White House. 

Wall Street has expressed concerns that Donald Trump’s election could impact the supply of the world’s largest crude producer, with Trump promising to make the U.S. more energy independent by ramping up oil and gas production. 

Recently, Citi predicted that another Trump presidency “could be net bearish due to trade tariffs, oil-and-gas-friendly policies/deregulation, and pushing OPEC+ to release oil to the market.”

However, commodity experts at Standard Chartered have predicted that actions by OPEC+ are likely to determine the near-and mid-term oil price trajectory. According to StanChart, much of the negative sentiment that has dominated oil markets over the past three months can be chalked up to misapprehensions about the tapering mechanism for the voluntary cuts made by eight OPEC+ countries. Many traders are worried that the balance of oil demand growth and non-OPEC+ supply growth might not offset the scale of restored OPEC+output, leaving oil markets oversupplied. However, the experts have pointed out that this assumption flies in the face of continued reassurances from OPEC+ members that the tapering would be fully dependent on market conditions rather than being automatic. Trader focus has been on the question of how many barrels could be returned before a surplus emerged; however, positioning and price dynamics imply that the answer to that question is zero. In a November 3 press release, OPEC announced that output increases would be postponed by a month until the start of 2025. StanChart says the delayed return of more barrels to the market does not necessarily mean that OPEC felt the physical market could not absorb the oil, but rather reflects its awareness that extremely pessimistic 2025 oil balance predictions have viewed the tapering through that lens. StanChart says the latest announcement by OPEC strengthens the case that the pace of tapering will be market-dependent and not automatic as traders fear. This realization is likely to have driven the latest oil price rally.

Oil & Gas Stocks Gain, Renewables Tank

Whereas oil futures have been choppy, the broader market as well as oil and gas stocks have reacted positively to the Trump victory. The S&P 500 gained 2.1% while the favorite oil and gas benchmark, Energy Select Sector SPDR Fund (NYSEARCA:XLE), was up 3.7% in Wednesday’s session. As expected, renewable energy stocks took a beating, with the iShares Global Clean Energy ETF (NASDAQ: ICLN) declining -7.3%.

Related: Bitcoin, Treasury Yields Jump as Trump Takes White House

The mixed reactions by oil markets are not hard to decipher. On one hand,  U.S. oil producers are looking forward to fewer regulations on crude production under a Trump presidency, meaning higher oil supply and consequently lower prices. On the other hand, a Trump win also means more sanctions on Iranian and Venezuelan barrels, potentially boosting prices.

“Conceptually, the impact of a potential second Trump term on oil prices is ambiguous, with some short-term downside risk to Iran oil supply … and thus upside price risk,” Goldman Sachs commodities analysts wrote in a research note Monday.

Iran’s oil exports have seen a strong rebound under the Biden administration with the U.S. and its allies hoping to strike a new nuclear deal with Tehran after the Trump administration scuttled the Joint Comprehensive Plan of Action (JCPOA) deal of 2015. Under former President Donald Trump, Iranian oil production tumbled from 3.8 million barrels per day in early 2018 to less than 2 mb/d in late 2020; in contrast, production has surged under Biden to 3.2 mb/d.

Meanwhile, a week ago, Reuters reported that PdVSA and its joint ventures exported an average of 947,387 bpd of crude and fuel in October, 21% over the previous month and the highest monthly figure since early 2020. Back in July, The United States Office of Foreign Assets Control (OFAC) eased some sanctions on Venezuela but retained sanctions on PdVSA. OFAC has issued a new license allowing certain transactions related to the export or re-export of liquefied petroleum gas (LPG) to Venezuela until July 8, 2025.  However, transactions with Petróleos de Venezuela, S.A., the Venezuelan state-owned oil and natural gas company in which PdVSA has a 50 percent or greater interest, remain prohibited under the sanctions imposed by various executive orders. 

That said, the renewable energy sector will likely be walking on eggshells under Trump. The Republican president has never hidden his disdain for clean energy (especially ‘windmills’). He has repeatedly lambasted the IRA, describing it as the “biggest tax hike in history”. Trump has pledged to rescind any “unspent” funds under the IRA should he ascend to the Oval Office, again, “To further defeat inflation, my plan will terminate the Green New Deal, which I call the Green New Scam,” the former president said before the Economic Club of New York in September.

By Alex Kimani for Oilprice.com

More Top Reads From Oilprice.com

• U.S. Sanctions Target Central Asian Firms for Aiding Russia’s War Effort
• Biofuel Producers Could Go from Boom to Gloom
• UAE’s ADNOC to Supply Gas to Germany From Its New LNG Project

Download The Free Oilprice App Today