A Trump presidency that comes gilt edged with both Houses of the US Congress. The surprise result has ramifications for geopolitics, the global economy and the energy, metals and mining industries. The Presidency does not officially begin until January 20th 2017, and the dearth of concrete policy proposals leaves a high level of uncertainty around the priorities of a Trump administration. That in mind, Paul McConnell of our Global Trends team and I sketch out initial thoughts on the implications.
Financial markets – equity and currency markets have not convulsed in response to the result; Brexit showed that a knee jerk reaction can be misleading, with UK shares subsequently rallying to new highs. US bonds yields may drift upwards to reflect risk and uncertainty, but realpolitik means policies can prove very different to pre-election rhetoric. It will be weeks, perhaps months, before markets are able to form a judgement of the new administration.
Oil markets – prices have edged up, consistent with a weaker dollar. But the current complex supply/demand fundamentals and the OPEC meeting at the end of this month may prove bigger influences short term. A reassessment of US support for lifting Iranian sanctions could materially impact oil markets given Iran’s resumption of exports and planned growth. However, the deal was a global one, and it’s doubtful a Trump administration will have the clout to kill it. More broadly, the stance on trade agreements and a possible imposition of tariffs on China and other exporters of goods will be key to global economic growth.
Any slowdown would lead to lower oil demand growth and defer a recovery in oil markets.
US energy industry – there are potential winners. Stated policies include energy independence, further exploitation of domestic oil, gas and coal reserves, encouraging gas demand, and job creation in the industry. The Keystone XL oil pipeline project from Canada into the US is more likely to get the green light. A favourable upstream environment would encourage more tight oil and gas production; lower taxes might be the way to incentivise investment by an industry currently in straitened circumstances at sub-US$50/bbl prices. The flip side of more drilling could be cost re-inflation, and more oil supply – with unintended negative consequences for oil prices.
Likewise, more gas drilling implies lower, more competitive Henry Hub gas prices.
But a US-centric focus could be negative for investment in more new US LNG, with non-US projects beneficiaries such as Canadian LNG. Higher US domestic crude production will be good for US refiners, but trade limits could be a threat to current chemical investments focused on export markets, particularly Asia.
US coal reserves are undisputed, but demand from the power sector has been in decline since the emergence of unconventional gas in 2005. A renaissance seems unlikely in competition with cheap gas. Clean energy too, could be a loser, if the EPA’s authority is curtailed; but state initiatives are likely to sustain the renewables sector for the time being.
Upstream M&A – international players have looked at entering US tight oil and shale gas as large-scale, accessible, low-cost growth opportunities, taking advantage of the downturn. US-centric energy and economic policies may lead to a pause for breath until the appetite for inward investment is clearer. Meanwhile, competition from unexpected angles may emerge – might ongoing weakness in the Mexican peso draw investment south of the border?
USA and climate change – the Paris Agreement on greenhouse gas (GHG) emissions ratified just last week with the US as a leading signatory, is now expected to meet significant resistance from a Trump administration and Republican Congress. The stated support for domestic fossil fuels including coal is at odds with the tighter control on emissions the US needs to meet its GHG reduction targets. Loss of US support could threaten the Paris Agreement’s chances of success.
Geopolitics – refocused US foreign policy based on isolationism could reshape key geopolitical relationships with Saudi Arabia and the other Gulf OPEC states including Iran; as well as Russia and China. This prospect will focus minds at OPEC’s forthcoming meeting in Vienna on November 30th where, in conjunction with Russia, OPEC is considering production cuts as part of a strategic response to US tight oil. The developing dynamic between these countries is likely to continue to influence oil markets through the course of a Trump Presidency.