In 2024, commodity trading margins hit a three-year low due to reduced volatility and efficient markets. However, the early actions of the Trump administration may introduce volatility that traders can leverage, particularly in the energy sector. The administration's executive orders and policies could reshape market dynamics, presenting both opportunities and challenges for commodity traders.

The Trump administration's energy policies emphasize deregulation and increased domestic oil production. However, funding for wind and solar energy development has been frozen, impacting key initiatives from the previous administration. This shift raises questions about the future of energy trading markets, influenced by political actions, producer responses, and market consolidation.

Three scenarios for energy trading markets under the Trump administration

1. The floor scenario — Trump's energy policies lead to stable market

In this scenario, the Trump administration implements most of its proposed energy policies, but the market remains largely unaffected due to economic realities. Oil majors may choose to maintain their current production levels to protect their profit margins, leading to a stable trading environment. The anticipated actions from the administration, such as deregulation and increased domestic oil production, may not significantly alter supply and demand dynamics. As a result, trading margins would likely remain similar to those seen in 2024, with the market driven primarily by fundamental factors rather than policy changes. Traders would find themselves operating in a predictable environment where the impact of new policies is already priced in, allowing for a focus on traditional trading strategies based on supply and demand fundamentals.

2. the flood scenario — trump's policies increase oil production and market instability

This scenario presents a more dramatic shift in the market, characterized by a significant increase in both domestic and international oil production. Under persistent political pressure, domestic producers may feel compelled to ramp up production, especially if sanctions on Russian oil are lifted. This influx of crude oil from both the US and Russia could lead to a saturated market, resulting in a sharp decline in oil prices. The drop in prices would exert severe pressure on upstream and midstream players, potentially triggering a wave of mergers and acquisitions (M&A) among North American oil majors and power companies. Deregulation policies and a more lenient antitrust environment could further fuel this M&A activity. Smaller and mid-sized companies may struggle to survive in this environment, facing the risk of being acquired or going out of business. The overall market would experience heightened volatility, creating both challenges and opportunities for traders as they navigate the rapidly changing landscape.

3. The folly scenario — trump's policies create a volatile trading environment

In the "folly" scenario, the Trump administration maintains a strong political push, resulting in a continuous stream of executive orders and tariffs that create a highly volatile trading environment. Frequent and unpredictable policy changes could disrupt market fundamentals, leading to increased geopolitical tensions and uncertainty. While the M&A environment may appear favorable due to deregulation, the high volatility and unpredictability could deter companies from pursuing significant M&A. Traders would face a turbulent landscape where the fundamentals of supply and demand are frequently overshadowed by political developments, making it challenging to develop coherent trading strategies. In this scenario, the energy market could become a battleground of speculation, with traders needing to adapt quickly to shifting policies and market conditions.

Emerging opportunities in power and gas markets under Trump's administration

The US power and gas markets are poised for significant changes due to new policies. Increased domestic manufacturing and artificial intelligence (AI) developments will reshape demand patterns, while the freeze on renewable energy funding will limit capacity additions. Traders should prepare for inefficiencies in matching supply and demand, particularly as gas will need to fill the gap left by reduced renewable capacity.

domestic oil market dynamics

In the oil market, traders face challenges from tariffs on Canadian crude and potential disruptions to supply chains. The lack of regulatory guidance on biofuels adds further uncertainty. While the rollback of electric vehicle targets may slightly boost gasoline demand, significant changes in fundamentals are unlikely. Traders should also monitor the administration's plans to stockpile oil, which could introduce short-term volatility.

Global commodities market impact

Globally, traders are closely watching the administration's tariffs and protectionist policies. The impact on trading margins will vary based on which scenario unfolds. In the "floor" scenario, political support for US production may not significantly increase supply, while the "flood" scenario could lead to an influx of Russian oil, reducing volatility in the long run.

Navigating uncertainty in commodity trading

Traders must remain vigilant in the face of policy changes while avoiding overreactions. Key strategies include:

• Investing in talent and assets to capitalize on market shifts, especially in power and gas. 
• Stress-testing decisions against various scenarios to understand risks.
• Avoiding large capital investments in structural changes due to potential policy reversals.

Despite the volatility, fundamental dynamics of production, trading, and consumption will likely remain intact, providing a foundation for traders to navigate the evolving landscape.