Oil prices drifted lower on Monday as market participants waited to see how the US President-elect Donald Trump positions himself on sanctions against Russia and Iran.
Oil prices were slightly lower ahead of Trump’s inauguration later on Monday.
Traders anticipate policy changes regarding oil and gas production in the US, and Trump’s stance on the Russia-Ukraine war.
“Of more interest to oil market participants is how the US President will position himself on sanctions against Russia and Iran,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said.
The Biden administration’s decision to tighten sanctions against Russia, implemented shortly before the transition of power, has sent shockwaves through the global oil market.
This policy shift has resulted in a substantial increase in the price of Brent crude oil, a benchmark for global oil prices. Prices had hit a five-month high last week as less oil was available from Russia.
The sanctions, aimed at curtailing Russia’s economic and political influence, have inadvertently disrupted the delicate balance of supply and demand in the energy sector.
Trump may ease sanctions against Russia
Russia, a major oil producer, plays a pivotal role in meeting the global energy needs.
The restrictions imposed by the sanctions have created uncertainty and apprehension among market participants, leading to a surge in oil prices.
This price spike has far-reaching implications for the global economy, as higher energy costs can fuel inflation, hamper economic growth, and increase the cost of living for consumers.
Warren Patterson, head of commodities strategy at ING Group, said in a note:
There is a fair amount of uncertainty across markets coming into this week given the inauguration of President Trump and the raft of executive orders he reportedly is planning to sign.
Some experts believe that oil prices were lower on Monday as traders expected Trump to ease some energy-related sanctions against Russia in exchange for an end to the war in Ukraine.
Commerzbank’s Lambrecht echoed the same tone as she expects Trump may use the sanctions against Russia’s oil exports as a “bargaining chip” to negotiate an end to the war in Ukraine.
Sanctions against Iran
In addition, the Biden administration had also imposed sanctions on Iran’s oil exports in the middle of December.
According to the International Energy Agency (IEA), this jeopardizes the export of around 500 thousand barrels per day.
“The big question now is whether incoming US President Trump will tighten the sanctions against Iran further, as he did in his first term in office,” Lambrecht said.
If tougher action against Iran becomes likely, oil prices could jump further in the current tense situation.
Iran currently produces about 3.3 million barrels per day of crude oil, according to data from the Organization of the Petroleum Exporting Countries.
Meanwhile, derivatives data showed that speculators increased their net long positions in Brent crude contracts.
According to ING, this reflects supply concerns among investors, following the sanctions against Russia and Iran.
Other decisions
Trump, who is set to be inaugurated for his second term as President of the US later today, is widely anticipated to introduce a series of policy changes in the initial hours of his new administration.
These changes are expected to include lifting the moratorium on US liquefied natural gas (LNG) export licenses.
This move is part of a broader economic strategy aimed at bolstering the American economy.
The decision to remove restrictions on LNG export licenses could have significant implications for the US energy sector.
It could potentially lead to increased LNG exports, which could benefit US LNG producers and create jobs in the energy industry.
Additionally, Trump could also approve drilling for oil on US federal lands and waters after taking oath later today.
Today’s price movement in the oil market indicated the black liquid’s vulnerability to the downside.
Even after enjoying a sustainable rally since the start of this year, the market remains vulnerable to geopolitical developments and uncertainties over supply.
David Morrison, senior market analyst at Trade Nation said:
The first big test could come later this evening when President Trump signs his first batch of executive orders.
“There could be some volatility should Trump announce anything to encourage the domestic oil industry to increase production.”
At the time of writing, the price of West Texas Intermediate crude was at $77.49 per barrel, largely flat.
Brent crude oil on the Intercontinental Exchange was also flat at $80.83 a barrel.
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