[WORLD] U.S. oil producers anticipate less constraints on crude output under a Donald Trump president, resulting in increased oil supply and reduced pricing. But it's not that simple: Trump, who was declared the victor of the 2024 election on Wednesday, has also promised to impose further sanctions on Iranian and Venezuelan barrels, potentially tightening the global market and driving up prices.
The potential reimposition of sanctions on Iran and Venezuela could have far-reaching consequences for the global oil market. During Trump's previous term, his administration's "maximum pressure" campaign against Iran led to a significant reduction in Iranian oil exports, removing nearly 2 million barrels per day from the global market. Similarly, sanctions on Venezuela contributed to a sharp decline in its oil production. The reintroduction of these measures could create a supply crunch, potentially offsetting any increases in U.S. domestic production and leading to higher global oil prices.
At the same time, Trump's greater possibility of trade battles may weaken global economic growth and reduce oil consumption. So the market's long-term prognosis is clearly mixed.
"Conceptually, the impact of a potential second Trump term on oil prices is ambiguous, with some short-term downside risk to Iranian oil supply... and thus upside price risk," Goldman Sachs commodities analysts said in a research note on Monday. "But medium-term downside risk to oil demand and thus oil prices from downside risk to global GDP from a potential escalation in trade tensions."
The interplay between geopolitical tensions and global economic growth adds another layer of complexity to the oil market outlook. Trump's "America First" approach to international relations and his willingness to engage in trade disputes could have significant implications for global economic growth. A slowdown in major economies like China, partly due to trade tensions, could dampen oil demand growth, potentially counterbalancing the supply-side effects of increased U.S. production or sanctions on other oil-producing nations.
Trump reaffirmed his support for increasing US oil production during a speech from the Republican campaign headquarters in Florida on Wednesday, just hours before his win was announced. He referred to Robert F. Kennedy, Jr., an independent candidate who he stated would join his team.
"Bobby, stay away from the oil, stay away from the liquid gold!" Trump made a funny comment. "We have more than Saudi Arabia and Russia." Kennedy is recognized for his environmental advocacy.
Under the Biden administration, oil and gas output in the United States reached new highs, despite campaign promises of environmental care.
U.S. crude futures — both West Texas Intermediate and international benchmark Brent crude — are now trading in the $70 to $75 per barrel region, which is lower than what many oil producers are looking for to balance their expenses and budgets as global demand for oil slows and supply grows.
The current price range presents a challenging environment for many U.S. oil producers, particularly those operating in higher-cost shale basins. While Trump's policies may aim to boost domestic production, the economic viability of increased drilling activities remains a crucial factor. The shale industry, which experienced significant growth during Trump's previous term, has since adopted a more disciplined approach to capital expenditure, focusing on profitability rather than pure volume growth. This shift in industry dynamics could temper the pace of production increases, even in a more favorable regulatory environment.
However, a further drive to start drilling projects, increasing supply, would result in lower prices, reducing income for American producers, according to Cole Smead, president and CEO of Smead Capital.
"If the Trump administration opens up federal oil and gas leases, federal lands will receive 25% of the money per barrel. You will have a difficult time finding an oil business that can make money at $52.50 per barrel with what they have left over from a $70 barrel," Smead said in an emailed statement. "The only thing that will cause drill baby drill to happen is higher oil prices based on these margins."
"Drill baby, drill is going to run into the energy vigilantes," according to him. "Now that stock investors in the oil sector understand what free cash flow looks like, they will not give it up. They will allow capital expenditures to increase over their dead bodies."
According to the Energy Information Administration, the United States is the world's top oil producer, accounting for 22% of worldwide output, followed by Saudi Arabia, which produces 11%. The great majority of US crude is used in the United States, which is also the world's top oil consumer.
The U.S. position as the world's leading oil producer brings both opportunities and challenges in the global energy landscape. While increased domestic production has enhanced America's energy security and reduced its dependence on foreign oil, it has also altered global market dynamics. The ability of U.S. producers to quickly ramp up or down production in response to market conditions has introduced a new element of flexibility in global supply, potentially reducing OPEC's influence on oil prices. However, this also means that U.S. producers are more exposed to global price fluctuations, which can impact their profitability and investment decisions.
The CEO of TotalEnergies, a French oil company, told CNBC over the weekend that whomever wins the president should guarantee that the United States does not lose its energy superiority.
"U.S. energy has been unleashed... since the last two, three years, production of oil in the country has never been so high," Patrick Pouyanne said.
"For me, today, the U.S. has a clear competitive advantage on energy compared to many [in the] rest of the world," added the governor. "So I will be surprised to see whoever is elected lose the competitive advantage."
Many market analysts predict that Trump's support of domestic oil production and increased supply would result in lower petroleum prices. Amrita Sen, the founder and head of research at London-based Energy Aspects, sees things differently because of the threat of penalties.
"Every hedge fund I've spoken with is negative because [Trump] has frequently tweeted about low oil prices... "I believe it's the opposite," she added. "There's an enormous amount of sanctioned barrels right now in the market, especially Iranian volumes." Iran is presently producing 3.5 million barrels per day or more of crude oil, according to Sen, with 1.8 million of them exported as sanctions and enforcement eased under the Biden administration.
"You could lose a million barrels per day of that ... when Trump was in power, Iranian exports were just 400,000 barrels per day," Sen. Ted Cruz stated. "Now I'm not saying it's going to go down all the way, because smuggling networks are probably bigger and better now, but you could lose a million there," she said, adding that some Venezuelan barrels may also disappear off the market.
Smead sees a negative picture, predicting reduced pricing that will place many producers, particularly those with greater production costs, in a less-than-ideal scenario.
"The price of goods that are produced is the number one factor in America's policies," according to him. "If you are not the low-cost producer, you should be scared."
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