Outlook 2017: Oil Market Prepares for Donald Trump Era

Written By: John Kingston
Written by John Kingston

Oil markets in 2016 saw prices drop below $30 in the first two months of the year, before things started kicking in that always kick in during commodity cycles: production cuts finally started tightening the supply/demand balance, rising demand in certain parts of the world spurred by lower oil prices—some strength in US gasoline demand was an example—also worked to tighten the imbalance; and by the end of the year, OPEC made promises of abandoning its laissez faire policy and returned to its original task it undertook when it was first formed: managing glut.

As the oil market now prepares for the Donald Trump era, here are some of the key drivers going into 2017.

 

The Regulatory Outlook in Washington

An unprecedented presidential election, court battles over hydraulic fracturing and oil pipelines, Arctic drilling plans and additional Renewable Fuel Standard drama rounded out the top five US oil policy stories of 2016.

But rather than just serving to fill out a year-end list, the biggest policy events of this year are likely to shape the policy path of the next, perhaps more than ever before. Here's a look at the top five stories of 2016 and how they will affect 2017: The presidency of Donald Trump, who made promises on the campaign trail to boost US oil and gas output and roll back regulations unfriendly to industry, is expected to be a stark policy departure from President Barack Obama, who spent much of his political capital over the past four years pushing efforts to combat climate change.

Whether Trump is successful in repealing those efforts, such as new rules on methane emissions, remains unclear at the moment, as does whether the White House can even play a role in how much oil producers actually drill.

But Trump's picks so far to fill out his cabinet, including ExxonMobil CEO Rex Tillerson to serve as secretary of state, show that the Trump White House will likely take a much more industry-friendly path.

On other federal government issues:

  • Trump has promised to quickly approve Energy Transfer Partners' Dakota Access Pipeline for Bakken crude and TransCanada's Keystone XL pipeline for Canadian diluted bitumen. To move Dakota Access, he can appoint a new head of the Army Corps of Engineers to replace Jo-Ellen Darcy, who called December 4 for a new environmental review of the project, withholding the final federal approval the pipeline needed. The application remains open because Darcy's order did not officially deny the needed easement to build on Army Corps of Engineers land in North Dakota. Reviving the dormant Keystone XL project would depend on TransCanada's interest in refiling its application based on the current demand outlook for Alberta's oil sands.
  • On November 18, the Obama administration finalized the legal schedule for all offshore oil and gas lease sales between 2017 and 2022. The plan offers 11 potential lease sales in four planning areas, including 10 in the Gulf of Mexico and one off the coast of Alaska in the Cook Inlet. But the plan also excluded sales planned for the Beaufort and Chukchi seas and an earlier version of the plan removed a lease sale planned for the Atlantic Ocean. On December 20, Obama went even further, designating the majority of federal waters offshore Alaska and portions of the Atlantic permanently off limits to oil and gas drilling. Trump has said he wants to expand the amount of drilling on federal lands and waters, likely including lease sales for both the Arctic and Atlantic. But redoing the offshore lease plan could take as long as three years and the expected legal fight to undo Obama's prohibitions on drilling in US Arctic and Atlantic waters could take even longer. This means that the Trump administration would not likely be able to hold a sale outside the Gulf of Mexico or Cook Inlet much before 2020.
  • There are a wide range of ongoing court battles. A federal district court judge in June overturned an Obama rule on fracking on federa lands; even if the Trump administration chooses not to pursue the appeal, it is likely environmental groups will.
  • On November 23, EPA said it will require refiners and blenders to mix 19.28 billion gallons of renewable fuel into the US transportation fuel supply in 2017, 480 million gallons more than it proposed in May. But the next administration's support for biofuels remains to be seen, after Trump sent mixed messages during the campaign and appointed Oklahoma Attorney General Scott Pruitt to lead the agency. Pruitt has sued EPA over various regulations and called the Renewable Fuel Standard "unworkable." Meanwhile, biodiesel producers are lobbying lawmakers to shift the incentive to domestic producers from blenders in response to rising biodiesel imports from Argentina and other countries.

For more information, please read Outlook 2017: Trump inauguration to bring major US oil policy changes.

 

Crude Oil Markets

U.S. crude exports could pick up in 2017 as many analysts have forecast a wider Brent/WTI spread. U.S. crude production is already on the rise, and will likely face fewer hurdles under a Trump administration, especially at a time when much of the rest of the world's producers are planning, in theory at least, to curtail output. Further, a radical shift in US tax policy could be on the horizon, with the potential to roil energy markets, at least according to some analysts. That shift is the Republican corporate tax reform plan, which at its most basic interpretation would encourage exports and discourage imports, with the potential to drive WTI significantly higher as domestically-consumed crude would be taxed and need a higher price to stay in the US rather than being shipped abroad. Analysts at Barclays expect the spread to widen to around $2/b through February, while Credit Suisse sees $1.25/b in 2017 and $2.50/b in 2018. Likewise, Goldman Sachs sees $1.75/b in 2017 and $3/b in 2018.So far in 2016, the prompt ICE Brent/NYMEX WTI spread has averaged just over $1/b.

For more information, please read Outlook 2017: Wider Brent/WTI spread should encourage US crude exports.

 

China

Surging crude oil imports, falling output, rising oil product exports and the emergence of independent refiners were some of the key themes that dominated China's oil industry in 2016 -- the Year of the Monkey. In 2017, China is expected to take a wait-and-watch approach.

Signs of this emerged towards the end of 2016 when the government tightened the noose around independent refiners and refrained from allowing them to export products next year. The Communist Party is also set to undergo a change in top leadership in 2017, and this is likely to slow down any major policy announcements. But China is expected to continue its focus on growth, the environment and reform of state-owned enterprises. So, oil price recovery, uncertainty around independent refiners, environmental concerns, and a new leadership of the Communist Party are some of the key themes to watch out for in 2017.

China's independent refiners face uncertain times in 2017 as the government comes down hard on them for compliance and tax evasion, and has rowed back from allowing them to export refined products. Beijing allowed independent refiners access to imported crude oil in early 2015 and to export oil products in late 2015. Their emergence, which came at a time of excessive oil supply, made them the darlings of oil suppliers. China's National Development and Reform Commission is expected to issue crude import quotas of around 20 million mt/year to new independent refiners for 2017, down 19% from 2016, according to Platts estimates. The downtrend has been clear. "The government will definitely continue to approve new quotas to independent refineries, but the slow reviewing process means fewer quotas will be allocated," a refinery source in Shandong said. The NDRC has said it will tighten supervision to ensure independent refiners are adhering to all rules before awarding them quotas.

For more information, please read Outlook 2017: Changes for China's oil sector in the Year of the Rooster and Outlook 2017: China's independent refiners face uncertain times.

 

North Sea

Amid higher oil prices, the UK's North Sea oil industry is talking up its somewhat slender prospects for revival. Backers of the 50-year-old North Sea oil industry tend to be torn between an optimistic "glass half full" approach and the evidence of years of decline since production peaked in 1999. A mini-revival in production in the last two years has helped keep hopes alive, with oil output running at nearly 1 million b/d -- still a third of 1999 levels. But while output has nudged up, and operating companies have largely kept bankruptcy at bay, investment has plummeted since oil prices crashed in mid-2014. Lobby group Oil and Gas UK thinks investment in the UK upstream sector will have dropped by 40% in 2016 to GBP 9 billion ($11 billion). That suggests that despite an expected boost from projects begun before 2014 -- including BP's redevelopment of two west of Shetland fields, Clair and Schiehallion -- production decline could soon return with a vengeance. The International Energy Agency expects UK oil production to resume declining in 2017. North Sea consultancy Hannon Westwood says oil and gas output could soon be falling at rates of 11% per year.

For more information, please read Outlook 2017: North Sea oil industry hopes gradually revive.

 

Iraq

The fight against Islamic State militant group may be the top priority for Iraq, but if success in 2016 turns into victory in 2017, Iraqi leaders will not be home and dry. The financial crisis remains crippling, low oil prices require a curtailment of fields, and internal political disputes could create a zero-sum race toward national disintegration. We have been here before. Iraqi leaders have repeatedly brought the country to the edge of the cliff and turned it around in a broad political agreement, though those deals themselves were not sustainable and often amounted to kicking the can down the road.

In and around Kirkuk, as well as north of Mosul, there are five oil fields, currently under the control of the Kurdistan Regional Government but which officially belong to the federal Oil Ministry's North Oil Company. The KRG took the Bai Hassan field and Kirkuk field's Avana Dome in June 2014 to protect it from IS marauders who were closing in on nearly everything in north-west and north-central Iraq with the collapse of much of Iraq's army.

However, Iraq has significant potential to chart a steady course through rough waters. For one thing, oil exports remain at record highs, production is steady, and the world's largest oil companies have invested throughout the country. Iraq faces a bottleneck for growth in that both domestic energy transfer infrastructure is underdeveloped and export infrastructure is at capacity.

This might be a good thing, because Iraq must cut 210,000 b/d from its overall production output to make good on its part of the OPEC and non-OPEC producer pledge to reduce global supply in an effort to increase oil prices. If Iraq, and its fellow producers, succeed, oil prices may rise to a point it will more than make up for reduced production. That will give Iraq more revenues, which could ease the financial crisis, though would also give Iraqi political leaders more to fight over.

For more information, please read OUTLOOK 2017: Iraq's oil challenges stretch beyond insurgency.

India

The dramatic rise in India's oil demand shows no signs of faltering, leading analysts to say that the country will remain a driver of Asian growth in 2017. Consumption is expected to rise 7-8% this year, outpacing China's demand growth for the third consecutive year. The cash crunch following New Delhi's move in early November to demonetize more than 80% of its currency is expected to temporarily dampen the country's appetite for oil products in the first quarter, or maybe a little longer. But gains in oil demand that the country is set to achieve from the "Make in India" initiative -- which aims to raise the share of manufacturing in GDP over the next few years -- will more than offset the negative effects of demonetization, analysts said.

For more information, please read Outlook 2017: India's oil demand growth rate to eclipse China's yet again.