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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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OPEC Steals The Headlines As Trump Effect Abates

Oil Rig

Regardless of which side of the political spectrum you’re on, investors often have a tendency to over exaggerate the impact that politicians have on the market. Donald Trump may or may not prove to be a great President, but it’s unlikely that he will be able to do much to revive the energy markets and benefit oil investors.

Presidents have the power to impose environmental regulations, but even after eight years under Obama, fracking, coal power, nuclear power, and a variety of other business practices still remain despite the fact that they are antithetical to most liberals. When Obama’s EPA pushed through particularly onerous environmental regulations, companies were quick to challenge those regulations in court, and they have been largely stuck there ever since. Like it or not, the same thing will hold true with Trump and lawsuits from environmental groups.

Trump’s impact on the broader economy is likely to be modest. He can help bring attention to various issues, but he can’t do much to directly aid the overall economy, especially without the help of Congress. Passing Obamacare was an enormously difficult exercise the first time around, and undoing it is likely to be just as difficult. If Trump makes this one of his priorities, he may have little ability to push through other changes which would help energy markets.

Perhaps more importantly, it’s unclear exactly what Trump could do that would help energy markets. A major infrastructure bill would probably help industrial metals producers and various infrastructure companies, but it’s not obvious that it would impact oil much. Reducing some regulatory red tape would help, but it’s not going to make oil go back to $80 a barrel. The problems in the energy market have largely been supply and demand related. And on that front, no act of the President or Congress can do much to help. Related: Obama Scraps Arctic Drilling Ahead Of Trump Presidency

OPEC, on the other hand, might be able to do more here. Goldman Sachs and other commentators have become more optimistic about an energy deal in recent days despite initial market skepticism. And there is reason for optimism – the Wall Street Journal and Reuters are reporting that a deal between countries is very close. Normally, one would need to take any OPEC deal with a healthy dose of skepticism, but in this case a deal could prove more durable. The reality is that all producers know that if they are found to be cheating on a deal, the entire production quota arrangement could unwind leading prices to fall back to the $30 range again. No one wants that.

At this point, the real drive for the energy markets is not President-elect Trump, but OPEC. In a lot of ways, the U.S. President is the most powerful man in the world, but not in this case. Investors looking at the energy markets now should look for companies that stand to benefit strongly from both OPEC and their own idiosyncratic circumstances. Related: Oil Prices Move Higher As OPEC Optimism Increases

One example of such a company is Marathon Petroleum (MPC). The stock is being targeted by activist investor Elliot Management, and as a large E&P company it would benefit from any OPEC deal. While MPC is up a lot in the last few days, the stock could have more room to run.

Significant amounts of investment research have shown that investors tend to hold their losers too long and sell their winners too early. The current energy markets may be just such an example of that. All signs point to an improving underlying set of economic conditions, a durable deal among major suppliers in the market, and a group of investors that are willing to come off the sidelines to invest in the stocks. One never goes broke taking a profit, but it might be too early to take a profit in energy names right now.

By Michael McDonald of Oilprice.com

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