Traders around the world have been buying up futures contracts for 2019 delivery of Brent crude at an impressive clip.
Traders around the world have been buying up futures contracts for 2019 delivery of Brent crude at an impressive clip.

One of the cornerstones of newly installed President Donald Trump’s vision for America includes some views of trade policy that would be unfamiliar, to say the least, when compared to those of prior decades. Among the protectionist proposals floated by the new administration is what’s being called a “border adjustment tax.” If such a policy were enacted, it would almost certainly benefit some domestic businesses at the expense of others that rely on the ability to make and trade commodities around the world.

The U.S. oil industry would likely be among the group that would ultimately lose money from a border adjustment tax. However, judging by recent market activity, it seems the oil world is fairly confident that this proposal doesn’t constitute a major threat.

The Wall Street Journal reported Feb. 22 that traders around the world had been buying up futures contracts for 2019 delivery of Brent crude at an impressive clip, especially when compared to the trading volume of West Texas Intermediate crude futures in the same period. This is notable because the Brent index is mainly based on trading activity in London, and predominantly comprises so-called sweet light crude oil sourced from the North Sea. Therefore, higher volumes of Brent futures contract purchases, and thus their increasing value, mean the oil market is assuming either the border tax proposal won’t really come to full fruition, or that if it does, the Brent index won’t suffer significantly.

Reading the tea leaves on tax plans
This trend is promising for the energy market in general, but it heaps uncertainty on top of uncertainty. The Wall Street Journal explained that on its face, the Trump border tax proposal would drive up the cost of imported oil, but significantly reduce that of exported oil drilled in the U.S. That’s because the plan calls for not only a significant tax on goods made overseas, but also major subsidies for domestic production and exports. An analysis of the plan from Goldman Sachs Group estimated the price of American oil (including WTI crude) would rise 25 percent above foreign oil (like Brent crude).

Not only are those predictions based on numbers and concepts that are still being debated, the actual existence of such a tax has been doubted even by the president himself. In a January interview with The Wall Street Journal, President Trump went on the record about the proposal in characteristic fashion.

“Anytime I hear border adjustment, I don’t love it,” Trump said, according to The Wall Street Journal.

While these trends in futures trading are certainly interesting, it’s crucial to keep them in perspective. Buying and selling oil contracts, along with most other commodities, has long been an extremely risky move. With renewed interest in Brent crude signaling a deeper meaning behind investor actions, it’s easy to conclude that economic professionals know something that others don’t.

However, some might argue that these trades are relatively routine. As The Wall Street Journal explained, these futures purchases are merely one of a number of small bets placed by individual institutions simply to contain risk, not assure a windfall. While it’s entirely possible that a big bet on international oil could pay off in a few years’ time, ultimately even the people in the highest levels of government are only slightly more informed than the average investor or the general public regarding what will come of a border tax. That leaves a common three-word adage just as true as ever: Wait and see.