Just before 3am on Wednesday morning, news broke that Donald Trump would be the 45th President of the United States. The announcement has both scared and excited Americans but regardless of voter’s opinions it comes as a surprise. Nearly every poll predicted Clinton the victor. The New York Times had Hillary predicted to win with an 85 percent chance. Needless to say, the market has reacted wildly.
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Graph by investing.com
During the heat of the election results, the Dow Futures market dropped over 750 points. By the end of the night, however, it had recovered and now rests nearly 200 points higher than the day prior. The WTI benchmark for December crude oil futures dropped as low as $43.36 at one point but rose to $45.80 in the later morning. The Russian Micex Index grew 2.2 percent and the Mexican Peso retreated over 11 percent against the US Dollar. Calling the evening unpredictable is an understatement.
Generally, unexpected news causes indexes to take sudden dives. The same pattern was witnessed with the Brexit in June when the Dow dropped more than 800 points over the course of the week. Aside from an unpredicted news flash, however, understanding Tuesday evening’s drop requires a closer look at Trump’s policies if he won. For this, we will focus primarily on the effects in the oil market.
Trump has made promises of reversing the Iran nuclear deal, which would restrict their oil production once more. It’s an unlikely move, considering he would have to convince the rest of the United Nations but a notion nonetheless. If this were to transpire, it would complicate OPEC’s talks in regards to a production freeze. Such events would mean continued increase in supply and further suppression of oil prices. Prolonging the OPEC agreement also ensures the increased instability of prices. Related: OPEC Has To Dump Its Oil Strategy Just As It Begins To Work
At the debate on September 27th, Trump was quoted saying, “NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country." By repealing NAFTA, transparency between North American countries could decrease meaning more unpredictability. Eliminating free trade could lead to tariffs on oil imports and exports and ultimately higher oil prices, “Moody's Analytics says such tariffs would hurt many U.S. industries, particularly autos, oil and technology, which rely heavily upon international supply chains.” Expectations were that Hillary would win the election and trade agreements would continue, but now this could change. All of this assumes Trump follows through on his goal of renegotiating NAFTA – a goal which will surely face stiff opposition in Congress and from industry.
Overall, the effect of Trump’s victory on the oil market won’t be clear until he takes office and considers these plans further. For now, traders should expect more wild gyration and increased volatility for oil and equity markets. In the long term, though, the safest decision that still offers a profitable opportunity for oil investors is to bet on America and the American Energy industry. There have been many times in the last 250 years where the country and the oil markets face unprecedented conditions, and throughout that time the overall direction has always eventually been upwards. Recessions, crises, and even depressions all occur periodically, but companies and markets always find a way to move forward.
To capitalize on short term volatility, an options strategy may be a better choice. A straddle on WTI oil futures would account for the volatility of the market no matter which way Trump’s policies move the commodity’s price. A probable move in oil futures will be his inauguration on January 20th.
By Michael McDonald of Oilprice.com
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