Trump's Oil Price Dilemma

Tyler Durden's picture

Submitted by Tsvetana Paraskova via OilPrice.com,

President-elect Donald Trump has started naming his picks for key administration offices, and it looks like he is beginning to assemble a team to deliver on at least part of his campaign promises of An America First Energy Plan.

Trump’s agenda includes lifting restrictions and opening onshore and offshore leasing on federal lands, eliminating the moratorium on coal leasing, and opening shale energy deposits. The President-elect’s key arguments for these policies are creating high-paying jobs, lessening and even eliminating America’s energy dependence, increasing tax revenues, and adding billions of dollars in economic activity.

Even if Trump were to deliver on all his pledges - as far as federal law and federal regulations are concerned - the U.S. oil production would be driven by the market—the economics of the supply and demand that determine the prices of oil.

At the time of Trump’s inauguration on January 20, OPEC and a dozen non-OPEC nations are set to begin to reduce crude oil supply with the purpose of killing the global glut and lifting oil prices. Ideally, OPEC/NOPEC taking 1.8 million bpd off the market would speed up the drawdown in global stockpiles and prop up prices.

In reality, few expect OPEC to stick to its commitments and cut as much as promised.

Still, oil prices are now north of US$50, and OPEC (even if some members cheat) may be able to talk prices up a month or so more. American production has been suffering the consequences of the two-year oil price rout, but if oil stays over US$50 for longer, it would entice more U.S. producers to return to work. Oil prices at US$60 or more would lead to even more confidence among U.S. producers—producers who are now ‘leaner and meaner’ and carefully choosing how to invest.

Essentially, Trump’s vision that the oil and natural gas industry could lead to the creation of “another 400,000 new jobs per year” depends on a resurgence in U.S. production, based on higher oil prices. And oil and gas companies in a recovering market may really need to add more jobs after having cut thousands of jobs over the past two years.

In the short term, it will be oil prices that would swing American production, not Trump’s pledge to lift restrictions on federal land. According to the Bureau of Land Management (BLM), the average approval timeframe for an application for permit to drill (APD) between 2005 and 2015 was somewhere around 200 days. The average number of days in which operators resolve any deficiencies has been higher than the number of days the BLM needs to process and complete an APD in every year since 2005 except in 2006 and 2008.

Trump’s promised rise of oil and gas production over the years could have several consequences: kill the oil price increase due to more supply available, lessen America’s dependence on foreign oil (especially OPEC oil as pledged by the President-elect), and increase U.S. exports of LNG and oil.

Increased U.S. production would be good for the oil and gas industry, and would create jobs not only in the sector but also in other industries and in all economic activity in areas close to energy producing sites.

Following the nomination of former Texas Governor Rick Perry as Secretary of Energy, American Petroleum Institute (API) president and CEO Jack Gerard “called on the nominee to make LNG exports a top priority at the Department of Energy,” the API said in a statement on Wednesday.

As for exports, Trump’s Administration may need to strike a delicate balance between increasing LNG exports and keeping enough cheap gas at home to avert price shocks for consumers.

What’s certain is that the oil and gas industry would curry more favor with the new Administration as opposed to the existing one, but any U.S. shale rebound is largely dependent on how oil prices fare, and how companies respond to those price increases.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Hohum's picture

Well, let's see if most of these companies can actually achieve consistent positive free cash flow.  A lot of debt is maturing is the next couple of years.

FatTony7915726's picture

Each time a muslim dies, some poor goat avoids sexual molestation and gets a good night's sleep.

Mark Urbo's picture

This guys assumptions are all wrong...

 

Its about growth - Trump will drive growth via infrastructure, jobs and a revived economy and therfore demand will increase - geez, where do these guys get educated...

LetThemEatRand's picture

We really don't need a crystal ball on this one.  Between the Goldman cabinet and Tillerson, we're going to see higher oil prices.  I plan to bet on it.

NotApplicable's picture

The only thing that can create a price increase in light of the financialized oil industry glut is WWIII.

LetThemEatRand's picture

I think it could happen short of WWIII.  There are a lot of tricks these guys can pull, including fucking with Iran (which Trump has already promised), combined with say tension between Russia and Turkey, more regional wars in the ME as we pound "ISIS" (also promised by Trump), tensions with China, and maybe even import duties to offset the cost of domestic production.

Beam Me Up Scotty's picture

Except that if 90% of the world's population is dead, oil will be virtually limitless again.  Instead of running out in 30 years, now it will be plentiful for 300 years or more.  In fact, if everyone is dead, oil will be free, because no one will be around to pay for it.

SallySnyd's picture

Here is an article that looks at how production levels from American shale oil will decline much more quickly than expected:

 

http://viableopposition.blogspot.ca/2014/12/overstated-tight-oil-reserve...

 

The original calculations by the EIA were overly optimistic, lulling us into a false sense of energy independence.

demi urge's picture

Ehhh, the tight shale is has actually already demonstrated to be far more persisten wrt to production than was initially anticipated. 

 

And that's not even getting into the fraclog...

demi urge's picture

Finally an OilPrice.com article that really makes sense!!!!!!

RagaMuffin's picture

Funny if Trump pumping it up leads to regime change in Saudi Arabia, Iran, Qatar, etc

HenryHall's picture

Yep. Bloody regime change in Saudi Arabia, Iran, Qatar, etc will have a really healthy effect on oil prices.

HenryHall's picture

Low oil prices?

Not a problem that isn't solved by stirring up a little wxaxr democracy in Saudi Arabia won't cure.

g'kar's picture

I like I-Booze

Zen Xenu's picture

I'm expecting oil prices to head down again shortly, as OPEC will likely fail to stick to their plan. OPEC has managed to jawbone up oil prices without actually reducing production. Nice trick.

I'm also expecting the Dow to crash badly, not long after it breaks 20,000.

Both oil prices and the U.S. stock market are acting irrationally exuberant. The upticks in both seem based on endless talk, while ignoring actual realities.

whatamaroon's picture

One sure fire fix to the oil glut is to do away with fuel economy regulations. Make American Muscle cars great again!

demi urge's picture

I just drove a Challenger SRT the other day... amazing car... damn thing still got over 20 mpg.

Never going back to the days of 5 mpg again, that's for sure.

Cassandra.Hermes's picture

Trump should bring the price down otherwise he is Russian crony

Cassandra.Hermes's picture

My home is 100% solar-geothermal, and I just bought 2017 Bolt EV, so i'm off the grid my other car is LPG so we can ditch West Virginia, Russia and Arabians, free energy is liberty

Madcow's picture

Trump may help slow down the increase in the acceleration of oil company bankruptcies if he can get the price back over $80. 

Most shale oil requires $100+

My guess is that gov-co will just nationalize oil resources after all the O&G companies go bankrupt. 

Production will plummet - but then they can just throw everyone in prison to clamp down on demand. 

So don't worry - the central planners have figured all this out - 

 

patriotinCalif's picture

When Trump opens federal lands - those lands have plenty of easy to get to oil. So o&g companies can drill below 50/bbl and still make money. We will be energy independent!  Can you imagine Saudis not selling to us? We sell oil to China. That would certainly add to our security.

daveO's picture

If it were only that simple. Leftists will sue and leftist judges will pull every trick in the book to prevent it. The major oil companies may even jump in w/the leftists! Selling the land would be easier. That's how North Dakota has been so lucky, private land owners.

hedgiex's picture

the reality is that Oil has never been priced on global market demand/supply metric when the hegemony sets in. The cartel (OPEC) existed under the aegis of the hegemony, a tolerated structure to ensure the stability in the petro dollar flows. Oil and Petroldollar is intertwined. 

Oil and gas production within US is as good as a tariff. It can be instituted as a protectionism for Jobs. "Indepedent Oil" have been resisted by the vested interests (eg the Bush family) in favor of the oil hegemony that needs to be enforced by armaments. If you take out all the hegemonic costs, are you sure that the price of oil will not rise to prices that makes it profitiable for domestic oil and gas production ? 

A G Zero World will break the cartel as each oil producing nation has its own balance sheet to take care. The industraial economies if not stifling technologies need less oil for production as well as embracing more alternative energies. The $ as reserve currrency no longer need to be undergirded by petro dollar. Energy with oil as a component will be the bedrock of protectionism by all nations. Having your own base, you arbitrage the price of global energy (oil included) for your America First growth and dominance.

It is naive to cling on to the myth of oil at free market prices without your hegemony to power your industrial economy. Besides, there have been many hanger-ons (eg Germany) when you have mainly dicated global oil prices. If you put America First with jobs in the oil industry and the spawning of related alternative energies with technologies, this is a TRADE OFF with the much vaunted PROTECTIONISM. Free Trade without protectionism is an ideal that all economies must embrace not just the US. Also, financial markets flourish through more additives and creative destructions. It is not zero sum. 

What consequences ? You really think that Trump (the Deal Maker) and his Secretary of State (the quintessential Oilman) do not know what they are doing.