By Taylor Wilman

As 2017 settles in and takes shape in the second month, markets are also getting to define their most likely trends for the year. Among the leading factors that are shaping how markets will behave in 2017 are elections in Europe especially in France and Germany, President Trump’s policies on international trade and immigration, as well as economic policies by the leading global economies including Japan, China, European Union and the US. Specifically within the oil industry, geopolitics and regulations are playing and will continue to play a big role in determining the direction oil prices take in the coming days.

Iran’s Defiance to US Sanctions

In direct defiance to the sanctions imposed by President Trump, Iran held a military exercise to test its ballistic missile and radar systems on 4th February 2017. According to information from the Iran’s elite Revolutionary Guards website, the aim of the exercise was to “showcase the power of Iran’s revolution and to dismiss the sanctions.” The head of Revolutionary Guards’ aerospace unit, Brigadier General Amir Ali Hajizadeh was quoted by Tasnim news agency as saying that “We are working day and night to protect Iran’s security.” He further added that “If we see smallest misstep from the enemies, our roaring missiles will fall on their heads.”

The ballistic missile testing by Iran and the ensuing announcements from the US and Iran governments set a stage for increased fears that the Iran-Saudi Arabia proxy conflict might take a dangerous route; since by imposing sanctions on Iran, US appears to be supporting Saudi Arabia. Rising tensions between the two countries might result to a conflict that will affect the Strait of Hormuz which is one of the global oil routes controlled by Iran. 20% of the oil traded globally every day passes by the Strait of Hormuz and interference with the flow of oil in that route would result to skyrocketing oil prices due to a sudden fall in global oil supply; hence making online trading of the commodity very lucrative for as long as the tensions persist.

Following the outright show of contempt from the Iranian government by testing ballistic missiles and ignoring US sanctions, Trump’s National Security Advisor Michael Flynn said that the US was “putting Iran on notice” over its “destabilizing activity”. On the other hand President Trump went to twitter and tweeted that Tehran was “playing with fire.” U.S. Defense Secretary Jim Mattis however noted that he was not considering raising the number of US forces in Middle East to deal with Iran’s “misbehavior”. He however warned that the world was not going to give a cold shoulder to the activities being carried out by Iran.

Rising Tensions between Iraq and the US

President Trump got into the Oval Office with a bang and immediately started fulfilling his campaign promises by passing executive orders on all the thorny issues he considered needed urgent attention before the dust settles. One of the executive orders President Trump has passed so far is the immigration ban of citizens from seven countries including Iraq for what he terms as security reasons. The Iraqi government did not take this lightly and lying low, instead they issued a counter immigration ban for all US citizens.

Although seen as a normal retaliatory action from Iraq, the immigration ban from both sides ruins the good relationship between the two countries; considering that Iraq is one of the strongest US allies in the Middle East in the fight against the Islamic State. If their relationship with the US is soiled, the fight against the Islamic State militants will suffer a huge dent. In addition, bad blood between the US and Iraq would mean that there will be tensions for international oil companies operating from the oil rich Iraq; which would eventually affect their productivity and hence lower global oil output. With lower oil output, oil prices will then start hiking hence affecting other countries globally that are not part of the US-Iraq immigration tussle.

US Regulatory Changes

President Obama and President Trump differ on many policy issues, with one of them being their stand with regard to climate change. Unlike President Obama, President Trump is not a firm believer in the climate change narrative and the science behind it and he is an open supporter of fossil fuels. Having a majority in the Congress, the Trump administration is ready to start changing the environmental regulations that were approved by the Obama administration. This means that instead of advocating for more clean energy and limiting exploration and mining of fossil fuels, Trump’s administration will in fact support it. The end result will be increased production of oil and other fossil fuels which increases supply in the market with the possible effect of lowering oil prices.

Looking at the geopolitics side of things, there is a growing threat of reduced oil production in the Middle East region as US relationship with Iran and Iraq continues to be shaky. However, considering that Trump’s administration is pro-fossil fuels, there could be increased exploration and production of oil from other parts of the world including mining of shale oil. It would be expected that the two sides of the coin would end up cancelling each other, but that will largely depend on how much oil can be produced in other parts of the world to counter any supply cuts from Middle East.

By Taylor Wilman