MW Trump's 'drill, baby, drill' pledge may be a win-win for drivers and oil producers alike
By Myra P. Saefong
President-elect's energy-friendly policies can help offset his plan to lift oil output
President-elect Donald Trump's pro-energy policies don't seem all that supportive for the oil market - at least not at first glance.
Some traders expect his plans to "unleash" American oil and natural-gas production and expand U.S. output to help lower prices for consumers, but also to potentially fuel a supply surplus that could hurt producers.
A likely offset to Trump's "drill, baby, drill" pledge is that energy-company executives aren't likely to change their investment decisions based on campaign slogans, said Matthew Polyak, managing partner at Hummingbird Capital, an energy-focused hedge fund.
Polyak sees the incoming president's slogan as more of an "indication of his support for the industry, rather than a factor that would directly impact supply-demand dynamics" for oil.
Trump's 'drill, baby, drill' slogan is more of an 'indication of his support for the industry, rather than a factor that would directly impact [oil's] supply-demand dynamics.'Matthew Polyak, Hummingbird Capital
Concerns about the outlook for global oil demand, particularly from China, have dominated energy trading for months. Prices this year, as of Wednesday, for U.S. benchmark West Texas Intermediate crude (CL.1) (CLZ24) were down by 4.5%, while those for global benchmark Brent crude (BRN00) (BRNF25) were 6.2% lower, according to Dow Jones Market Data. Since Nov. 6, when Trump was declared the election winner, WTI oil has lost nearly 4.6%, while Brent is down 3.5%.
Yet Trump could advocate for policies that support international demand for U.S. oil, such as "lifting export restrictions or securing trade agreements that increase demand abroad," said Jay Young, founder and chief executive of oil-and-gas operator King Operating Corp.
Trump often has repeated a pledge to boost domestic energy production and "bring Americans the lowest-cost energy and electricity on earth."
The U.S. already ranks as the world's biggest oil producer, with production running at record highs, given its domestic output of 13.5 million barrels per day for the week ended Nov. 1, according to the Energy Information Administration.
That could leave little room for expansion in production levels from record highs.
Exxon Mobil Corp. $(XOM)$ CEO Darren Woods believes there may not be an opportunity to unleash a lot of oil production in the near term because most U.S. operators are already optimizing their production, he said in an interview Tuesday at the opening of the United Nations' COP29 climate-change summit in Baku, Azerbaijan.
Supply-price trend may soon develop
Still, with the U.S. producing 13 million barrels per day, another one or two million barrels per day can easily be added, leading to "slightly lower" costs for oil, said James Cordier, founder, CEO and head trader at Alternative Options, a commodity trading adviser.
"Nearly everything consumer-related can be attributed to the price of energy," Cordier told MarketWatch. Trump's desire to bring prices down for consumers "certainly doesn't have to mean ruin to the domestic energy market."
A key to lower energy prices may not be how fast new production can come online from Texas, he said. Instead, the likelihood of lower prices will be determined from what happens overseas.
If the Russia-Ukraine war ends with a negotiated settlement, more Russian barrels will filter into broader availability, likely bringing down oil by $5 to $7 a barrel, said Cordier. If the end to war in the Middle East is soon at hand, that could bring crude prices lower by another $5. All the while, Trump will likely be in constant contact with Saudi Arabia "as the two nations look to forge a friendly partnership."
That could lead to energy prices that end up being profitable for U.S. producers and "extremely" affordable for the consumer, Cordier said. That's not likely to happen overnight, but a "definitive trend could soon be developing," he said, adding that U.S. oil prices may hover in the low-$60s for a time and eventually move below that during offseason demand.
Infrastructure improvements
Trump's first administration supported policies that gave priority to energy independence and reduced regulatory barriers - both of which can be "favorable for those looking to expand oil-and-gas operations," said King Operating Corp.'s Young.
The fossil-fuels CEO said the U.S. industry stands to benefit from a more predictable and investment-friendly environment under Trump's policies, which may include tax incentives, favorable drilling regulations and efforts to open up more federal lands and offshore areas for exploration.
Any such moves would fall in line with Trump's campaign pledge to "free up the vast stores of liquid gold on America's public land for energy development."
Trump promised to "remove all red tape" that he said has stranded oil and natural-gas projects, including speeding up the approval of natural-gas pipelines into the Marcellus Shale, an area under the Appalachian Basin known for its "fracking" potential that includes Ohio, West Virginia, Pennsylvania, New York and other states.
Trump's support for the industry "through potential deregulation of federal-acreage drilling or support for interstate-pipeline permitting could make oil-and-gas markets more efficient across the country," said Hummingbird Capital's Polyak.
By reducing regulatory risks and clarifying foreign policy, we may see "increased investment interest in energy stocks," which the hedge-fund partner touted as "currently undervalued" relative to the market.
Polyak argued that energy represents only 3% of the S&P 500 SPX but contributes nearly 10% of its free cash flow - and he thinks that's "where the opportunity is most compelling to investors."
Still, the Energy Select Sector SPDR Fund XLE increased only 3.6% during the first Trump administration, as MarketWatch's Joseph Adinolfi recently reported, and further lackluster performance during his second term can't be ruled out.
Bullish or bearish for prices?
There's also the possibility that "the U.S. and global economies grow more aggressively in the coming years due to Trump's policies and their extended impacts," said Michael Cuggino, president and portfolio manager for the Permanent Portfolio Family of Funds.
In that case, demand for energy, and oil, would likely strengthen and "any energy supply surpluses will quickly turn to deficits - even with expected higher U.S. production offsetting such a shortfall," said Cuggino.
When asked if Trump's presidency would be bullish or bearish for oil prices, he said it "depends - and maybe both."
There are many facets to this question, among them "the adoption of alternative energy sources and how quickly they achieve scale and replace fossil fuels, the Trump administration's ability to pass its pro-growth initiatives, as well as the policies of its friends and foes," said Cuggino. "The supply-demand relationship at any given time, geopolitical issues, the strength of the U.S. dollar and/or the use of alternative currencies to facilitate global payments" are also factors to consider.
All of these forces may impact the price and availability of energy, and many "may work at cross-purposes with each other," he added. "There is a balance here, and the potential for a 'win-win' between the objectives of producers and consumers."
-Myra P. Saefong
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November 14, 2024 06:30 ET (11:30 GMT)
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