Trump’s win pushes OPEC to cut production, says BofA’s Blanch

Saudi Arabia's Energy Minister Khalid al-Falih talks during the 23rd World Energy Congress in Istanbul, Turkey, October 10, 2016.

Murad Sezer | Reuters
Saudi Arabia’s Energy Minister Khalid al-Falih talks during the 23rd World Energy Congress in Istanbul, Turkey, October 10, 2016.

The election of Donald Trump to the presidency gives OPEC members another reason to agree to oil production cuts when they meet next week, says Bank of America Merrill Lynch’s head of global commodities and derivatives research.

Saudi Arabia is trying to guide OPEC members toward a deal to cut production by 4 to 4.5 percent, in a bid to balance global supply and perhaps boost oil prices by about $10 a barrel.

Merrill’s Francisco Blanch told CNBC there are three ways Trump’s win and the Republican clean sweep of Congress will affect OPEC’s forecast:

1. GOP driving dollar and interest rates higher

First, the policies the GOP is pursuing are generating a stronger dollarand higher interest rates, neither of which bode well for emerging-market countries — or for oil demand in the developing world, he said.

A stronger greenback makes dollar-denominated crude more expensive when it’s bought in other currencies, and higher U.S. interest rates tend to give investors an alternative to putting their money to work in emerging markets.

“It’s very important that OPEC comes back together, given the potential weakness in emerging market demand,” Blanch told CNBC’s “Squawk on the Street.”

That will be particularly true if President-elect Trump follows through with his campaign threats to impose tariffs on goods shipped from emerging markets including China, he said.

2. Threat of a boost in US production

Second, Trump’s goal of boosting U.S. energy output by rolling back regulations threatens to exacerbate the global oversupply of crude. American drillers have reduced their output because they face higher costs of production than many OPEC nations.

“So now OPEC has to deal with a rising threat of more supply from the U.S. at a lower cost, because that’s what lower regulatory hurdles mean for supply in this country,” he said.

3. Iran could fall in line

Lastly, Iran is now more likely to play ball with regional rival Saudi Arabia. Trump and Congressional Republicans are both fierce critics of a deal reached by the United States and five other world powers to lift sanctions on Iran.

That accord has allowed Iran to increase its oil output and claw back market share, but Tehran cannot boost production and exports much more without foreign investment. Republican control of the White House and Congress makes it more likely Iran will face renewed sanctions, and that threat will discourage potential investors, in Blanch’s view.

“Effectively their worst case scenario for next year, which is keeping supply where it is today, probably just became their best case. I don’t see a lot of … international companies going into Iran, a lot of financial institutions going into Iran, given all the uncertainty as to what a new Trump administration with a Republican clean sweep is going to do to Iran,” Blanch said.

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