New York — Oil markets may be underestimating the risks to US production and export growth from the upcoming 2020 US presidential election, analysts told S&P Global Platts.
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Analysts expect that if a Democrat wins in November, the incoming administration will likely introduce new regulations limiting fracking, flaring, offshore drilling, and possibly exports, but it remains unclear how far these initiatives may go.
"The market has become a little complacent in pricing in re-election for President Donald Trump," OANDA senior market analyst Edward Moya said. "The risks are pretty high. While Trump is still favorite, we still could see a progressive candidate come out with the nomination. It would be bad news for the US oil industry."
Among the highest polling candidates, populists Senator Elizabeth Warren (D, MA) and Bernie Sanders (I, VT) have pushed hardest for policies aimed at severely limiting the US oil sector, including a ban on exports, fracking and leasing on federal waters. Other candidates, including frontrunner Senator Joe Biden (D, DE), have taken a more measured approach, not committing to all-out bans, but indicating that new limits and additional regulation would be considered.
"If [President Donald] Trump wins it is status quo, but any Democrat - even if it's not a populist - would be under tremendous pressure to throw the base a bone and this is a bone they could throw," Confluence Investment Management chief market strategist Bill O'Grady said.
US oil output has surged in recent years following the lifting of a decades-old crude oil export ban in late 2015 that allowed producers to ship surplus barrels abroad. Previously, most US production had to be consumed domestically by refineries, the bulk of which are tooled to run cheaper heavy, sour crude imports from the Middle East and Venezuela. This limited domestic appetite effectively put a ceiling on the mostly light, sweet crudes being produced in the Permian and other tight oil plays.
The build-out of significant US Gulf Coast pipeline infrastructure during the Trump administration further incentivized US production by de-bottlenecking West Texas oil plays and propelled US crude output and exports to records heights in 2019. US crude production steadily increased in 2019 to more than 12.8 million b/d in December from around 11.8 million b/d in January, and exports soared to a weekly peak of 4.46 million b/d in late December, according to US Energy Information Administration.
OUTPUT GROWTH SLOWING
US output growth is already slowing, with producers unwilling to boost spending and drilling at current prices, and capital drying up. A recent Dallas Federal Reserve survey showed the industry is already concerned about increasingly limited access to capital, stagnant prices and looming bankruptcies in the Permian and other US shale plays.
"If Trump wins, it's helpful for oil supplies in the short run," O'Grady said. "The market would take a populist victory as bearish for oil stocks, but probably bullish for prices as it would reduce supply."
On average about a quarter of US crude production has been exported each week in 2019. With US refineries maxed out on how much light sweet crude that they are willing to take, an export ban would likely flood local storage capacity and force producers to cut output or risk glutting the market.
"[A Democrat] wouldn't have Congressional support across the board so some restrictions might be hampered, but I think you would see further consolidation in the industry, and even the mention of an export ban would weigh on the sector," Moya said.
Crude export facilities along the US Gulf Coast have grown their capacity to export from about 5.4 million b/d at the start of 2019 to a current estimate of about 7.7 million b/d, according to S&P Global Platts Analytics. And that capacity will likely grow to over 8 million b/d in 2020, as several major infrastructure projects are expected to start up.
Oil commodity markets are so far not yet pricing-in these policy risks, analysts said, but volatility is expected to increase during the second half of the year as the November election draws closer. Instead these risks have mostly manifested in the energy equity space.
Energy stocks have struggled to keep up with an equity price boom. The S&P 500 Energy Index finished 2019 around 5.5 % higher, compared to a nearly 29% annual increase in the broader S&P 500 Index, S&P Global Platts data shows.
"Energy equities have been a real laggard this year, we have come to the conclusion that this is not a one off, but part of a broader trend. If energy stocks continue to languish, we probably will see drilling activity roll over, oil stocks tighten and prices rise," O'Grady said. "This looks like a direction thing, this election could accelerate or decelerate this process, but I think this trend is in place. This is the world we are heading toward and it's not oil friendly."
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