Trump Will Set Sights on Lower Oil Prices Amid Russia Peace Negotiations
Trump's two-fold agenda will mean lower commodity prices, even if OPEC protests.
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The price of brent oil has come down from its lofty highs of $81 per barrel (BBL) at the start of this year, to about $75 per bbl.
Each time it tries to rally, it pulls right back toward the low end of the range, to the detriment of OPEC+ as it waits for the oil price and demand to pick up so that it can meaningfully release all of the production it is holding back.
This has been its strategy since the post-COVID cut, hoping that demand would pick up soon to then bring all those barrels back onto the market. Four years later, those barrels are still kept on hold. This has been one of its biggest miscalculations, as China has been on a deflationary spiral and demand was down year over year, instead of up last year. In addition, China has shifted away from diesel more toward liquified natural gas and other sources.
Today, the oil market is more about supply restraint than demand. As former president Joe Biden announced more sanctions on Russia before leaving office, this saw the price squeeze as the year started, as Russian oil buyers needed to find a new route. After the initial ramp up, prices are back down as China imported less from Russia. India made up for some of the slack, but net there is about 61% of the tankers that were sanctioned are now idle.
Talks of peace between Russia and Ukraine are ongoing as President Trump is bent upon reaching a peace agreement, which will also take further pressure out of the oil price. Trump has had a dual focus since he took office: get trade back in U.S. favor and lower deficit spending so that he has more room to maneuver spending.
The latter goal will only come if inflation is in check. But on Thursday, the CPI came in at 0.5% month over month versus the 0.3% expected, with Core CPI rising to 3.3% year over year.
What spooked the market was that the super core CPI was higher, as services inflation proves to be sticky. This is making the Fed’s job harder as it is unable to cut rates to lower its interest expense.
As much as Trump is making calls to the Fed to cut, he needs to cut a deal with OPEC+ to release all of its oil to pressure prices. But that would work against the interest of the Middle Eastern group, as it requires higher prices to offset all of its future spending plans.
The only way it could work is if Trump tightened Iran and Russia, allowing other members to pump more, gaining market share even if at a lower price, as long as net revenues stay the same. If prices fell, it could actually stimulate demand from the all-important China. It has become a highly-sensitive player these past few years, unlike in the old urbanization demand days.
Many analysts claim oil to be "cheap," given OPEC+’s resolve, but they forget that commodities move on demand/supply balances, not on how cheap they are or how much they have lagged. For now, there is no shortage. All roads lead to a lower oil, a win-win for all, really.
At the time of publication, Bengali had no positions in any securities mentioned.
