The Trump administration in the US is about change the geopolitical oil chessboard in many more ways. Protectionist policies may lead to stronger dollar and lower oil prices, says a Bank of America Merrill Lynch report.

So far, oil has held up on the recent Opec deal and rising global inflation expectations. However, oil prices in local currency are approaching 2014 levels and emerging market demand growth, the bastion of world oil demand, could suffer, syas the Global Energy Weekly report.

Moreover, a sharp downturn in trade due to US and UK protectionism is a key risk to the world economy. With the elasticity of trade to global growth running at just 1 compared to 1.5-2 prior, protectionist policies could slow trade further and hurt oil demand, it said.

Lower oil demand could be partly offset by a US review of Iranian sanctions. Yet the bank's economists believe that the likelihood that Trump cancels the Iran Deal is overstated.

The report says: "True, the incoming US Administration may deter many international oil companies from tapping Iran’s vast oil resources, the world’s 4th largest at 158 billion barrels. In contrast, the different perspective offered on Russia could result in meaningful changes related to the current sanctions regime. With the Artic holding possibly about 420 billion barrels of oil, or 20 per cent of the world’s total, the medium term oil supply picture could improve."

Eventually, a thawing of the US-Russia relationship may even lead to a resumption of strong growth in both the Russian Artic as well as in Russian shale at the Bazhenov formation, a resource potentially containing as much as 140 billion barrels of hydrocarbons, it says.

Protectionism will not help reverse the ailing global trade picture and will lead to retaliation. A trade war would severely hurt oil demand. In particular, measures like a border adjustment tax, coupled with an increasingly hawkish Fed, would likely lead to a much stronger dollar, and lower oil prices, down the line.

"For now, we retain our 2017 global oil demand growth projection of 1.2 million bpd and our mid-year Brent target of $70 per barrel. However, global oil demand tends to level off after the summer and we see oil back at $60/barrel by year end," the report said.

From a longer-term production standpoint, a more hawkish stance on Iran but a friendlier view of Russia is a tit-for-tat. Both nations contain vast reserves and desperately need capital and technology. The real risk that the incoming Trump administration brings to oil is an emerging market demand slowdown via trade and growth, it added. - TradeArabia News Service