For those of you looking to allocate more to energy sector, we would avoid the US side for now and go with the Canadian producers like CVE and SU.
At this point, there’s pretty much nothing that will take us away from this scenario. So, if oil demand does recover back to 2019 levels by end of 2021, and we observe normal demand growth, a super spike is coming.
Increased regulation, limits on flaring, ban of fracking on federal lands, no more leases on GOM, and a host of other stuff will prevent US oil production from growing wildly.
Under a Biden administration, US oil production will never fully recover back to ~13 mb/d. Oil market deficit set to balloon to -4 mb/d by 2025, assuming all OPEC+ spare capacity.
Major media outlets have already announced Biden to be the next POTUS. While nothing is official “official” yet, the odds of Trump winning a 2nd term look unlikely.
Welcome to the Biden is president edition of Oil Markets Daily!
The election cycle has been nothing but rollercoaster-like. Even with major media outlets announcing the winner to be Joe Biden, the “official” tally has not been confirmed yet, which likely explains why the betting market still has Trump at 13.1% of winning.
While the odds are going to be very low for Trump to come around and win the presidency, let’s look at what a Biden presidency means for the oil market.
Now, the 2nd element of all this is where the Senate ends up. At the moment, a Republican Senate is favored at 81% versus ~19% for Democrats. So, the prevailing odds suggest it’s going to be a gridlock, where the Democrats control the White House and the House of Representatives, while Senate is controlled by Republicans.
For the oil market, the key driver of global supply growth, US shale, will be crippled in the near term. This is a great chart shared by a subscriber, and it points out some of the things Biden will do right away when he becomes President.
Platts estimated that a Biden victory will curtail as much as ~2 mb/d of future US oil production.
Under the Biden scenario, US oil production pretty much never recovers back to its previous high. And it makes sense considering that three of the things the Biden administration will tackle immediately are:
• Harsh standards on natural gas flaring on public and private lands.
We’ve seen what an uncooperative federal government can do in Canada even with the Alberta government being accommodative, and we can’t fathom what Biden will likely do to US shale producers.
Permian US shale oil producers will be hit the hardest from a Biden administration because, for starters, a harsher restriction on gas flaring could really impact the ability of producers to bring on US shale oil wells. Texas gas flaring was as much as ~0.7 Bcf/d in 2018, which means all of that excess growth in the oil side will be limited going forward.
TRRC, the Texas Railroad Commission, has in the past turned with a blind eye on the insane flaring that takes place in Texas. So, with federal pressure on this front, this could see the “turn a blind eye” process of issuing unlimited gas flaring permits to be eliminated.
And with pipeline buildouts at risk, capital costs will rise, and so project sponsors will demand a higher return to commensurate with the increase in risk. Gas is a byproduct in Permian, and so unlike the Northeast where producers are willing to sign multi-year take or pay contracts to incentivize infrastructure buildout, it’s going to be hard in the Permian. Read from source….