Oil Braces for a Price Plunge
The global oil market has digested the news of Donald Trump’s election as US President and has stabilised around $72 per barrel for Brent crude. What’s next? Likely, the impact of the so-called "Trump factor" is currently limited to the mere fact of his election victory, as the new President has not yet taken office. That will happen on 20 January. Until then, the market operates on expectations rather than reactions to real actions, which are yet even to be outlined in concrete plans. However, it is worth noting that oil prices will not only be influenced by Trump’s anticipated moves on US oil production or potential new sanctions on Russian oil exports. It could turn out that the promised steep tariffs on Chinese and European goods, proposed by Trump, become an equally significant factor. It is highly likely that, following the $72 mark, we will see prices closer to $60 per barrel for Brent crude. Perhaps even as low as $55 could be reached.
Donald Trump has begun forming his administration, with key positions gradually being filled. Notably, on 17 November, it was announced that Chris Wright, who has been known as the CEO and founder of Liberty Energy, will become the Secretary of Energy and a member of the National Energy Council. Wright, with his strong specialised engineering education and a lack of career experience in government structures, signals what his appointment might entail. First and foremost, it means a significant push for the development of oil and gas production and export.
Chris Wright is not only an advocate for the simple idea that increasing fossil fuel production can lift people out of poverty worldwide. He also knows how to achieve such increases in production with minimal costs. While the US has many capable experts and efficient managers in the oil and gas sector, Wright uniquely combines the roles of expert, top manager, and evangelist of energy revival in one person.
American oil and gas producers are hopeful that Chris Wright will decisively eliminate the additional regulations previously introduced that hindered fuel production growth. Wright is also a staunch proponent of US "energy dominance" in the global market. Most importantly, he knows exactly what needs to change in the US market and regulatory framework to achieve this dominance.
Specifically, Wright proposes the swift resumption of permits for new liquefied natural gas (LNG) export terminals, which were temporarily halted roughly a year ago. Despite this, LNG exports from the US have continued to grow steadily.
This raises the question: how is oil connected to the state of the LNG market? The connection is significant, albeit indirect, as there is a dependency between LNG and oil prices. Cheaper LNG tends to lead to falling oil prices.
According to the US Energy Information Administration (EIA), US oil exports have been growing at a brisk pace over the last three years. The latest available data for August indicates an increase in the average daily export volume from 2.992 million barrels in August 2021—before the war in Ukraine and the sanctions for Russia — to 3.907 million barrels in August 2024. This marks a roughly 30% increasing over the three years of war.
What can be expected as Wright takes charge? It is already known that he supports Trump’s plan to maximise oil and gas production. That pertains to oil supply. But what about demand?
So far, everything indicates that the Trump administration will swiftly implement protective measures in favour of American manufacturers. It is already known that Trump plans to introduce additional high tariffs on Chinese goods (up to 60%) and possibly on European goods (10% or 20%). In such a scenario, a downturn in China’s economy will be inevitable. A decline in exports from many other countries will also follow.
From there, a chain reaction of economic slowdown is expected across various nations—from China and India to Singapore and Thailand. A rapid contraction of economic activity typically reduces the need for oil. Demand from China, India, and other importing nations will begin to shrink. This will result in an even faster global decline in oil demand.
A reduction in demand and falling oil prices will create a complex scenario with many developments as events unfold. OPEC+ countries are still maintaining self-imposed restrictions on production and exports, which keeps oil prices above market levels.
However, Russia occasionally attempts to discreetly violate these restrictions. Russian exporters find it easier to breach OPEC+ agreements when selling oil bypassing sanctions—often above $60 per barrel. "Shadow" Russian tankers, old and environmentally hazardous, transport oil to be sold through opaque channels.
If there is effective enforcement against these grey tankers for environmental reasons, it could alter the pricing landscape. However, the nature of this impact will depend on the mechanisms used for enforcement.
At present, tension is building in the market. Prices are fluctuating slightly but are not yet ready to dip below $60 per barrel. But, psychologically, the market already appears prepared for such a shift. The situation is simmering on a slow heat but is not yet ready to be served.
Meanwhile, the world is eagerly awaiting the inevitable and significant drop in oil prices, as this will also lead to lower fuel prices at petrol stations.
When this process reaches its logical conclusion, Donald Trump will score another victory. He promised a sharp deceleration in inflation. The fall in oil prices—and consequently fuel prices—will slow the cost of almost everything. When it happens, it will be a significant contribution to the future successes of the Republicans.