.
While the OPEC deal gave a year-end rally to oil prices after a turbulent year, depressed prices are likely to continue to be the new normal for 2017. This New Year will be a better year than 2016, but only by a small uptick.
With mid-terms on the horizon, President Donald Trump is betting on an energy rebound to deliver jobs to those who turned out for him in great numbers in Pennsylvania and the wider shale-rich parts of the U.S. Domestically, Trump will push to re-start the U.S.’s energy industry by fast tracking long-delayed pipeline projects, pulling back a number of Obama’s cumbersome environmental and energy regulations, investing in new infrastructure to enhance the nation’s energy grid, and potentially lifting the energy export bans. Abroad, the President will turn his sights on pressing Saudi Arabia and Russia to do their part in cutting back production and stabilizing the market.
Higher oil prices are key to bringing further economic growth at home in his first year in office. Will this work?
Factors that Kept Prices Low in 2016 Are Still in Play
These include over-supply of the market (Russia, for example, produced at its highest levels in decades), energy diversification and renewables are on the rise, depressed global demand (slowdown in China but rising demand in India), U.S. shale’s lower re-start costs, and returning producers (Libya and Iran).
Higher Prices/High Stakes
It’s not just the incoming administration, which needs a boost in energy prices. Saudi Arabia, Russia, and Iran’s year-long wrangling to reach a deal to cut production has been a welcome relief to their fiscal reserves which had been greatly hit by falling prices. Their market share battle (a war as well on American shale) had become too costly. Saudi Deputy Crown Prince Mohammed bin Salman’s ambitious Vision 2030 reforms likely would have lost traction in 2017 if the young prince failed to secure a production deal. Riyadh now has room in their 2017 budget to offset the austerity measures with fiscal stimulus.
OPEC’s Return
After months of skepticism, OPEC’s year-end save brings the cartel back in play in moving the markets, but their ability to shake the market is still greatly diminished and agreement amongst members still remains a fraught diplomatic exercise. As much as they need higher oil prices, Riyadh and other cartel members still have to contend with the U.S. and Russia. It’s also an open question still whether OPEC members and non-OPEC members who signed onto the deal can follow through with their cuts.
Mixed Geopolitical Forecast
Geopolitical events will certainly impact 2017’s markets and this upcoming year looks to be no less volatile. With Trump looking to reset relations with Moscow and more pro-Russian leaning governments emerging in Europe, tensions with China will likely more so than Russia will likely dominate 2017, ISIS will likely face substantial setbacks this year, Yemen and Libya will continue to be hotspots, Iran will unlikely to be as big of point of contention as the leadership in Tehran seeks to avoid a confrontation with Washington. Angola is headed closer and closer to civil war.
This leaves the new administration in Washington with a mixed price forecast as it navigates its foremost priority, strengthening America at home so it can compete more effectively abroad. Black swans such as Iran taking aggressive action in the Strait of Hormuz or shale not exceeding expectations may lead to a rise of prices in 2017.
However, even with all these observations, forecasting the market is never a precise science and psychology is always at play. If all else remains equal, one should not expect prices to reach above $70.
About the author: Dr. Andrew Bowen, a national security and energy expert at Dūcō, is a Visiting Scholar in Foreign and Defense Policy Studies at the American Enterprise Institute.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
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Energy Security and Trump’s Higher Oil Price Wager
Vector energy panorama, green energy and polluting energy, windmills and ecology against oil rigs and petroleum
January 23, 2017
While the OPEC deal gave a year-end rally to oil prices after a turbulent year, depressed prices are likely to continue to be the new normal for 2017. This New Year will be a better year than 2016, but only by a small uptick.
With mid-terms on the horizon, President Donald Trump is betting on an energy rebound to deliver jobs to those who turned out for him in great numbers in Pennsylvania and the wider shale-rich parts of the U.S. Domestically, Trump will push to re-start the U.S.’s energy industry by fast tracking long-delayed pipeline projects, pulling back a number of Obama’s cumbersome environmental and energy regulations, investing in new infrastructure to enhance the nation’s energy grid, and potentially lifting the energy export bans. Abroad, the President will turn his sights on pressing Saudi Arabia and Russia to do their part in cutting back production and stabilizing the market.
Higher oil prices are key to bringing further economic growth at home in his first year in office. Will this work?
Factors that Kept Prices Low in 2016 Are Still in Play
These include over-supply of the market (Russia, for example, produced at its highest levels in decades), energy diversification and renewables are on the rise, depressed global demand (slowdown in China but rising demand in India), U.S. shale’s lower re-start costs, and returning producers (Libya and Iran).
Higher Prices/High Stakes
It’s not just the incoming administration, which needs a boost in energy prices. Saudi Arabia, Russia, and Iran’s year-long wrangling to reach a deal to cut production has been a welcome relief to their fiscal reserves which had been greatly hit by falling prices. Their market share battle (a war as well on American shale) had become too costly. Saudi Deputy Crown Prince Mohammed bin Salman’s ambitious Vision 2030 reforms likely would have lost traction in 2017 if the young prince failed to secure a production deal. Riyadh now has room in their 2017 budget to offset the austerity measures with fiscal stimulus.
OPEC’s Return
After months of skepticism, OPEC’s year-end save brings the cartel back in play in moving the markets, but their ability to shake the market is still greatly diminished and agreement amongst members still remains a fraught diplomatic exercise. As much as they need higher oil prices, Riyadh and other cartel members still have to contend with the U.S. and Russia. It’s also an open question still whether OPEC members and non-OPEC members who signed onto the deal can follow through with their cuts.
Mixed Geopolitical Forecast
Geopolitical events will certainly impact 2017’s markets and this upcoming year looks to be no less volatile. With Trump looking to reset relations with Moscow and more pro-Russian leaning governments emerging in Europe, tensions with China will likely more so than Russia will likely dominate 2017, ISIS will likely face substantial setbacks this year, Yemen and Libya will continue to be hotspots, Iran will unlikely to be as big of point of contention as the leadership in Tehran seeks to avoid a confrontation with Washington. Angola is headed closer and closer to civil war.
This leaves the new administration in Washington with a mixed price forecast as it navigates its foremost priority, strengthening America at home so it can compete more effectively abroad. Black swans such as Iran taking aggressive action in the Strait of Hormuz or shale not exceeding expectations may lead to a rise of prices in 2017.
However, even with all these observations, forecasting the market is never a precise science and psychology is always at play. If all else remains equal, one should not expect prices to reach above $70.
About the author: Dr. Andrew Bowen, a national security and energy expert at Dūcō, is a Visiting Scholar in Foreign and Defense Policy Studies at the American Enterprise Institute.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
