U.S. Oil Policy in the Spotlight
2022.11.10 04:46
This week saw several important developments on the future of U.S. oil policy, production, and the price cap policy on Russian oil. Traders should be aware of how these developments are likely to impact markets.
1. U.S. Midterm Election Results
Although some election results are still being tabulated, it appears as though the Republican Party won a slight majority in the U.S. House of Representatives but did not achieve a significant enough victory that the results can be interpreted as a repudiation of the Biden administration’s policies. Control of the U.S. Senate is likely to go to the Republicans, but it remains unclear. When it comes to energy policy, this means that if policymakers vote along party lines, the Biden administration will not be able to pass a windfall profits tax on oil companies when the next Congress convenes. traders should expect that even if Republicans take control of the Senate, the Biden administration will continue to use its control over the executive branch and the bureaucracy to continue to stymy oil and gas production. We are unlikely to see additional auctions for oil and gas leases on federal land unless they are ordered to by the courts. Oil companies are not likely to expand drilling more than they have currently planned under these conditions.
2. U.S. Domestic Oil Production Outlook
Many U.S. independent oil producers (e.g. Diamondback Energy (NASDAQ:), ConocoPhillips (NYSE:), Occidental Petroleum (NYSE:), Pioneer Natural Resources (NYSE:), Laredo Petroleum (NYSE:), and SM Energy (NYSE:)) delivered sobering for Q4 2022 and 2023 oil production. Even though production in the U.S. is expanding this year and has come close to pre-pandemic levels, it seems that growth is leveling off and production might even decrease in 2023. Last quarter’s Dallas Fed Energy Survey revealed that producers considered escalating costs due to inflation and supply chain problems the most significant causes of uncertainty. These issues and others, such as rapid decline rates, are impacting producers across the oil patch. Many predict that they will grow production at much lower rates or might even see declines.
3. Oil Price Cap Developments
The U.S. and EU announced a significant development regarding the oil price cap it plans to implement against Russia next month. They announced that their price cap will only apply to the first point of sale of Russian oil. The price cap policy denies access to U.S. and EU shipping, insurance, and banking infrastructure to parties that purchase Russian oil at a price above the price cap. The actual price cap has not yet been decided. This means that Russian crude oil can be resold globally at any price or it can be refined into products that can then be sold at any price. This makes Russian oil even more attractive to countries like India, China, Turkey, and Indonesia, who can not only continue to purchase Russian crude oil for domestic use but can potentially buy even more Russian crude and trade it on the global market or refine into products they can sell globally. If they agree to a negotiated price with Russia that is at or below the price cap, transporting that crude oil will become even easier. Of course, Russia may still decline to sell its oil at the price cap level. Until the price is announced, it is very difficult to predict what will happen when the policy goes into effect.
