The Trump Effect Hits Oil: Uncertainty Is Weighing on Prices

The oil market has started the week on a shaky note, with prices falling for the second consecutive day following President Trump's inauguration for his second term. Brent crude for March delivery dropped 0.85% to $79.49 per barrel, while WTI crude for February delivery declined 1.5% to $76.68 per barrel. The uncertainty surrounding Trump's new policies is a significant factor in this price decline, as market participants await clarity on the administration's approach to energy and oil production.



According to PVM oil analyst Tamas Varga, the market's performance so far this year has been cautious, with some investors taking profits before the Trump administration's policies become clearer. "Given the performance of the market so far this year, it is reasonable to see some people take profit before the Trump administration's modus operandi becomes clearer," Varga told Reuters.

The uncertainty surrounding Trump's policies has led to a range of predictions about the future of oil prices. A survey by law firm Haynes Boone LLC revealed that banks are preparing for oil prices to fall below $60 a barrel by the middle of Trump's new term. Trump has indicated that he will push shale producers to ramp up output, which could potentially increase supply and put downward pressure on prices. However, commodity experts at Standard Chartered have predicted that the strength in oil markets witnessed at the start of the new year is likely to persist, powered by factors such as the removal of more Russian barrels from the market following sanctions.

The new restrictions on Russian crude oil tankers, which roughly triple the number of directly sanctioned Russian crude oil tankers, are expected to affect around 900,000 barrels per day (bpd). While Russia may try to circumvent these sanctions by employing more shadow fleet tankers and ship-to-ship transfers, Standard Chartered sees 500,000 bpd of displacements over the next six months. Other factors contributing to the strength in prompt markets include OPEC+'s adherence to its target quotas, robust non-weather-related demand, and lower-than-expected non-OPEC supply growth.

In the long term, the potential effects on oil prices are multifaceted. On one hand, Trump's policies could lead to increased domestic production, which might put downward pressure on prices. However, the actual increase in production may be limited by resource constraints and regulatory challenges. For instance, the White House has limited levers to incentivize faster supply growth, such as allowing additional leasing of federal acreage or reforming the permitting system for new energy projects. These measures may not be sufficient to significantly boost production in the short term.

Moreover, the decline in US oil production, which peaked in 2023 and has started declining in 2024, is expected to accelerate in 2025. This decline, coupled with OPEC+'s refusal to raise production until Brent rises above $85 a barrel, could lead to a supply deficit. As Dr. Mamdouh G Salameh, an international oil economist, noted, "Trump's ability to influence prices is tied up by the peaking of US oil production and OPEC+'s refusal to raise production until Brent rises above $85."

In summary, the uncertainty surrounding President Trump's new policies creates a volatile environment for the global oil market. In the short term, this uncertainty can lead to reduced investment and delayed projects, while in the long term, the actual impact on oil prices will depend on the effectiveness of Trump's policies in increasing domestic production and the response of OPEC+ to market conditions.