02.05.2017

Expert Commentary: Trump's regulations over energy may take time

by Dukascopy

During Obama's presidency, the US energy industry was hit strongly by environmental protection measures. Now, oil and gas industry is expected to surge forward. Do you share this point of view or not? In your opinion, will Trump's regulations help the US become more energy independent?

At the moment, it is hard to say whether the energy industry is really going to surge forward thanks to Trump's regulations. Still, with relatively low oil prices, the industry is not going to receive more money regardless of any regulations the President might implement. What I mean is that the government can still make these rules easier for the companies, but it will not change the investment significantly. Overall, the new regulations implementation might be positive, but it is still not a game changer. Furthermore, I suppose that there is no need for the President to relax the environmental regulations because the industry is already capable of meeting higher environmental standards.

 

Analysts pointed out that not regulations, but supply and demand are the major drivers in energy industry markets. Are you of the same opinion or not? Why? 

Absolutely, I am of the same opinion. Even though politics and government interference can change the course a little bit, supply and demand is what really drives the commodity industry, which, in turn, is set by marginal-cost producers.

In the last couple of years, the energy industry has been having hard time: capital spending was cut, companies were forced to sell assets, borrow money and lay off people because of sheer economics. Then the global oversupply concerns made the OPEC sign the output cut deal, compliance to which is really high at the moment. The deal was struck not because these countries wanted to but because they had to: the alternative to that would be the situation in which some of OPEC countries would have gone bankrupt, therefore, they were forced to do the inevitable to balance supply and demand. Going forward, I do not think that any of the OPEC countries will be motivated to cheat on the deal, as it has been always done in the past, because they are aware of the ramifications of oil prices going back to $30 per barrel, which no one will be happy with.

 

Main oil traders expect high possibility of output cuts being prolonged beyond the end of June in an attempt to reduce a global surplus of crude oil. Do you share this point of view or not? Why?

I believe that the OPEC will be forced to extend the production cut beyond the June revision date and the reason for that is still the same - oversupply. Another very important concern for the OPEC is that companies had been able to cut costs and improve operating efficiency significantly over the last two years, which has helped those companies survive and even make profit at much lower oil prices. Consequently, the $50+ oil will bring additional production to the US and will actually allow Canadian oil firms to come to new efficient tools, especially with the completion of the pipeline. Thus, the OPEC will be forced to extend the deadline of the agreement to hold production at the current level.

 

Where do you see oil prices in the short and long term?

I think that in the short term oil prices will be trading between $55 and $65 per barrel. In the long run, oil prices will have to be slightly higher than that, because even the $55 oil will not be enough to attract additional capital needed to be invested in new sources of energy, to extend the reserves, increase supply and production. The energy industry will need to lift up capital spending in order to increase supply, which will not be possible to achieve until oil prices go above $60 a barrel.

 

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Fadel Gheit 

Senior Energy Strategist at Oppenheimer&Co, on energy industry and oil prices

 

 


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