U.S. prices have gained nearly 9% year to date ahead of the presidential inauguration
The volatility seen in oil prices in the new year has a lot to do with Donald Trump – and he doesn’t even officially become the president of the United States until Monday.
U.S. oil prices climbed above $80 a barrel for the first time in months this week, widening a premium over forward contracts – a situation referred to as backwardation. Some analysts attributed the move to tight supplies, driven by President Joe Biden’s decision to widen U.S. sanctions on Russia’s energy sector, and uncertainty over how Trump will react to the move and impact the supply-and-demand balance once he takes office.
“The steep backwardation in crude futures is being driven by market participants rushing to secure nonsanctioned barrels at the front end of the curve, pushing near-term prices meaningfully higher than the back end,” Rebecca Babin, senior energy trader and managing director at CIBC Private Wealth, told MarketWatch.
Countries like India and China that import oil from Russia are “avoiding sanctioned barrels for now, waiting to see how U.S. policy evolves under Trump,” she said. Biden’s administration on Jan. 10 announced fresh sanctions on Russia’s oil market, targeting two major oil producers.
India and China, the biggest importers of Russian oil, don’t want to “risk strained relations early in [Trump’s] presidency, so they’re adhering to the additional sanctions imposed by the Biden administration,” Babin said. “As these nations seek alternative barrels, the spot and physical [oil] markets have tightened, particularly in the short to medium term.”
February West Texas Intermediate crude (CL.1) (CLG25) settled Wednesday at $80.04 a barrel on the New York Mercantile Exchange. That was the highest front-month contract finish since Aug. 12, according to Dow Jones Market Data.
Prices eased back to settle at $77.88 on Friday, but have gained 8.6% year to date and continue to trade in backwardation, with current prices notably higher than forward contracts. The February 2026 WTI contract, for example, traded around $69.15.
With this backwardation in the futures curve, “smart money can sell spot oil at today’s prices” and buy it back in 12 months through a futures contract that is selling at a roughly $10 discount, said Manish Raj, managing director at Velandera Energy Partners.
U.S. output boost
Raj believes the steep backwardation in oil futures may be the “market’s way of betting that Trump is going to dramatically raise oil production.” However, “some of this may be the traders drinking the Kool-Aid,” he said, suggesting that the bet may be a bad idea.
Velandera Energy Partners does not see a big jump in domestic crude barrels this year, said Raj. Given record-high output, “how exactly Trump is going to dramatically raise oil production remains a mystery.”
As of Jan. 10, U.S. crude production stood at 13.481 million barrels per day, according to the EIA. Weekly output had reached a record high of 13.631 million bpd during the week ended Dec. 6.
Some analysts have said that some of Trump’s policies will favor expansion of oil and gas operations, potentially by easing drilling regulations. Ahead of Biden’s exit, his administration moved to ban most new oil and natural-gas drilling in U.S. coastal waters.
Read: Trump’s ‘drill, baby, drill’ pledge may be a win-win for drivers and oil producers alike
Trump has threatened to immediately reverse Biden’s decision. The new president, however, won’t likely be able to boost oil supply “without tax reform or other financial stimulus methods for the industry,” said David Deckelbaum, managing director at TD Cowen. Most oil drilling is on private lands and “motivated by economics.”
Contradictory changes
Still, “Trump’s first 100 days [as president] are likely to bring contradictory changes to the oil market,” said Violeta Todorova, senior research analyst at Leverage Shares.
She expects that in those first several days in office, Trump will prioritize increasing domestic oil and gas production – but she believes those efforts will have little near-term impact because it takes years for new projects to come online.
‘Trump’s first 100 days [as president] are likely to bring contradictory changes to the oil market.’Violeta Todorova, Leverage Shares
Todorova also said Trump may push for a negotiated settlement in the Russia-Ukraine war. If successful, a settlement could lead to the lifting of Western sanctions on Russia oil exports, boosting global supply and driving oil prices lower.
The new president may also provide strong support to Israel against Iran’s nuclear ambitions, she said. That may lead to increased instability in the Middle East and “escalate tensions in the region that holds some of the world’s most crucial oil supply routes.”
“Broader geopolitical risks and trade policies under [the] Trump administration could contribute to oil price volatility,” as some of his policies will “exert downward pressure on the oil market, while others will push prices upward,” Todorova said.
Tariff threats
Trump has also threatened to implement tariffs on China, Canada and Mexico.
The impact of those would depend on the specifics, but in broad terms, Babin said higher tariffs on China would reduce global demand for products by driving up prices, which could decrease demand for crude oil and diesel.
Tariffs on Canadian crude would increase domestic gasoline prices, she noted. The U.S. imports heavier grades of Canadian crude that the U.S. doesn’t produce domestically, particularly for refining in the Midwest. “Tariffs would raise the cost of those imports, filtering down to higher gasoline prices,” Babin said.
Meanwhile, the impact on crude oil and products from tariffs on Mexico, she added, would be less significant compared to Canada and China.
Short term, Babin expects Trump’s policies to likely lead to higher oil prices, particularly if geopolitical risks escalate or sanctions tighten. However, “in the longer term, aggressive use of tariffs – especially against China – could weigh on global demand, ultimately driving prices lower.”
Leverage Shares’ Todorova, however, said broader trade disputes and “retaliatory measures from affected countries could slow economic growth and destabilize global crude markets, causing price volatility.”
“The overall impact of Trump’s policies is likely to create uncertainty in the oil market rather than a clear path to lower or stable prices,” she said.
Source: MarketWatch