Cheap oil is not the Trump administration’s top energy priority

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Good morning. US stocks finished up yesterday following reports that US President Donald Trump might give some countries a break on reciprocal tariffs, or delay imposition past “Liberation Day” on April 2. Will that actually happen? Who knows. But traders gotta trade on something. Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

Reading between the lines of Trump’s energy policy

The Trump administration’s energy policy has two central aims; they are contradictory. It wants cheaper oil (and cheaper energy generally), and it wants higher US production. But US production will rise mostly as a function of higher prices, which attract investment. So anyone interested in the oil market will be looking for clues about which policy priority will prevail.

We may have got one yesterday. In a Truth Social post, Trump stated that the US would hit countries that import Venezuelan oil with 25 per cent across-the-board tariffs starting on April 2.

Who was the biggest importer of Venezuelan oil in 2024? The US, naturally. Whether that means the US intends to stop importing Venezuelan oil, plans to tariff itself or neither, Unhedged does not know. Here, from Capital Economics, is a chart of millions of barrels of oil per day exported from Venezuela in 2024, based on ship tracking data:

The administration has also revoked Chevron’s license to extract oil in Venezuela. While Chevron did recently get an extension, the company is still expected to exit the country in late May.

Venezuelan oil exports are a small part of the international market. According to Kieran Tompkins at Capital Economics, only 0.5mn b/d, or less than 1 per cent of global daily production, will be impacted by these tariffs. “This isn’t a massive deal for the oil market in and of itself,” said Tompkins. But the US has also started to heavily enforce oil sanctions against Iran, going after tankers carrying Iranian oil. Together, the Venezuela tariff and the Iranian sanctions could reduce global oil supply by 1-1.5mn b/d, according to Tompkins, which is starting to be meaningful. And that is not even including eventual tariffs on Canadian oil, which will have big implications for the US oil market.

Whether the Venezuelan oil finds its way around the tariffs or is taken off the market altogether will depend on how the tariffs are implemented. But, all else equal, pressure on Iran and Venezuela piled on top of tariffs on Canadian oil will drive the oil price up. Might Opec+ reserve releases ameliorate the situation? Helima Croft, global head of commodity strategy at RBC Capital Markets, thinks this is unlikely. Recent policy moves and comments from Opec+ officials suggested that members of the cartel “are not looking to back [Trump’s] coercive foreign policy . . . [they] will not open the floodgates”, she said. So, on balance, the market is looking at higher prices and, as such, higher US production.

As with any Trump tariff, the relationship between what the president says and what ultimately happens is highly irregular. But if the tone of the administration’s rhetoric is any indication, for oil and for markets generally, low prices are not the administration’s real priority. US industrial primacy is.

(Reiter and Armstrong)

Turkey

Last week, Turkish President Recep Tayyip Erdoğan imprisoned Istanbul’s mayor Ekrem İmamoğlu, who was widely expected to challenge Erdoğan or his party in the next presidential election. Protesters took to the streets and markets swooned. Turkey’s main stock index dropped by 20 per cent through the week, and barely recovered yesterday:

Turkey has been Unhedged’s case study for how much politics can matter to markets — particularly when politicians threaten central bank independence. Starting in 2021, Turkey experienced a terrible bout of inflation. Rather than counteracting it, Erdoğan strong-armed the central bank to adopt unorthodox monetary policies, hoping to sweeten voters in the run-up to an election. That caused households to pile into the equity market as an inflation hedge. Foreign investors joined in once the central bank was put in firmer, seemingly more independent hands in June 2023:

According to data from Turkey’s central bank, foreign investors had been increasing their exposure to Turkish bonds for a year or so. “The equity market [sell-off] was mostly by domestic investors”, who also powered the first big equity surge, said Emre Akçakmak, head of frontier markets at East Capital Group. So foreign selling may be more to blame for last week’s jump in Turkish government bond yields:

Currencies are more sensitive to political risk than any other asset class. While Turkey’s central bank has built up its foreign currency reserves over the past several years, and conducted a historically large intervention to support the lira last week, that has only slowed the fall.

In the past, foreign investors had been taking advantage of Turkey’s ultra-high interest rates for carry trades. If those positions are still in place, they are being unwound quickly now.

Back in November, many, including Unhedged, observed that there could be a Turkish Trump trade. Turkey is something of an economic go-between for Russia and the west, and Trump seems determined to end Russia’s war in Ukraine. Indeed, there was such a trade: Turkish equities have done well since, both on the prospect of peace in Ukraine and changes in Syria. But they have not performed as well as other EM equities, specifically stocks in eastern Europe, which may see an even higher peace dividend and have benefited from the shift in European fiscal policy. Domestic turmoil could have been a catalyst for investors, particularly those global investors who were still in the market, to exit in favour of other EMs, says Akçakmak:

Erdoğan’s recent moves serve as an important reminder that, in Turkey, sensible policy can be withdrawn at any time, if doing so serves Erdoğan’s purposes. For global investors without special insights into the political system — if any such exist — the country’s assets can be traded but can never be a permanent and significant portfolio component.

Many have wondered if the US’s own political problems — including what some see as a brewing constitutional crisis — will ever be reflected in American asset prices. It’s too soon to tell. But Turkey’s example suggests that the key thing to watch is the independence of the central bank. That’s where the trouble starts.

(Reiter)

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