The election of Donald Trump has made U.S. shale more resilient. Meanwhile, the OPEC production negotiations remain difficult. Connecting these two dots suggests this may not be the right time for a deal. Even if one is concluded in word, its execution is even more in doubt.

President Trump is Pro‐Oil
The election of Donald Trump as President of the United States is admittedly surprising given the general conclusion of pre‐election polls that Hillary Clinton had a higher probability of winning. The election results, however, appear to be uncontested and thus we turn our attention to the presidency of Mr. Trump. There are few details regarding a likely Trump energy strategy, but clearly, President Trump will be pro‐business and thus pro‐fossil fuels. Furthermore, we expect an approach that tends towards energy‐autarky. That is, policies or non‐ policies that encourage the development of domestic energy sources with an objective of greater self‐sufficiency and less reliance on foreign sources. This approach is consistent with Mr. Trump’s campaign platform eschewing global free trade and hinting at military/political isolationism.

Connecting Trump Presidency to OPEC Deliberations
It can be foolhardy to try to connect two dots that are quite distant from each other, but for the global oil market, the most pressing issue today is the potential for an OPEC production deal by the end of November. As the election results sink in, one can connect this dot with Mr. Trump’s election, albeit with a loose, perhaps easily breakable connector.

Now May Not be the Time for OPEC Deal
As we have written in previous analyses, Saudi Arabia’s decision in Algeria to reverse policy and seek an OPEC deal on production has ended up backing the Kingdom into a corner as several fellow OPEC countries have adopted a two‐track strategy of, on the one hand, lifting their output in a pre‐deal gamble to secure better terms and, on the other hand, insisting on being outside of the deal. Meanwhile the tangible participation of outsiders like Russia seems improbable. It is ESAI Energy’s view that the election of Mr. Trump subtly shifts the balance of power in the oil market. A Trump presidency that is pro‐business will encourage oil development, permit pipelines, reduce corporate profit taxes and generally make U.S. oil more competitive. This is a distinct departure from the anticipated climate friendly Obama‐Clinton policies.

Although many analysts believe weaker post‐election oil prices will encourage an OPEC deal, that may not be the case. OPEC’s power is in its ability to keep producing at low prices. Raising oil prices will only strengthen the U.S. oil sector, intensifying competition with an industry that now has the full backing of the President and a Republican Congress. This means if a good OPEC deal is unreachable, the Saudis are more likely to walk away under the pretense of taking a “wait and see” attitude regarding the new President, while continuing to keep the pressure on U.S. shale. This also may give the Kingdom a bargaining chip down the road when regional security issues come up between the Saudis and the new President. So, now may not be the time for an OPEC deal. If indeed an OPEC deal falls off the table or is agreed in word but not deed, the recovery in crude prices will be delayed and constrained in 2017.
Source: ESAI Energy