The slogan “Drill, baby, drill!”, which was a recurring theme in Donald Trump’s election campaign, was supposed to herald good times for the mining and energy sectors. However, is there a risk that Donald Trump could harm these industries? A significant increase in oil production in the USA could lead to a decrease in its price, which would not necessarily be beneficial for the extraction sector. However, it could lower gasoline prices at pumps. From a Polish perspective, the potential expansion of LNG gas exports could be significant.
Investors in the extraction and energy sectors currently have mixed feelings. The initial optimism resulting from Donald Trump’s victory has started to fade: analysts fear that his policy could have the opposite effect on oil prices. Trump could increase oil production by abolishing regulations and issuing more drilling permits, which could lower its price. This phenomenon is clearly seen in the changes in the price of this commodity and the quotations of sector companies: they are usually convergent, but diverged significantly after the election. Since the election, the ETF SDPR S&P Oil and Gas Production fund, which includes key companies in the gas and oil sector, has risen by nearly 7 percent, while the prices of Brent and WTI crude have fallen by about 5 percent.
The final confirmation that the Republicans have won the majority in the House of Representatives increases the chances of significant deregulation in the oil industry. This, in turn, would facilitate the implementation of Trump’s promises to intensify oil production. However, at this moment, the market is concerned about an oversupply of raw materials next year. Additionally, Trump has announced tariffs on products from China, which could slow down the economy of that country and lead to further weakening of the demand for oil. According to the International Energy Agency, global oil markets will face a surplus exceeding 1 million barrels per day next year. This is because demand in China continues to weaken. This alleviates pressure on prices, despite upheavals in the Middle East or other regions. As a result, some analysts predict that Brent crude oil prices may drop to 60-65 dollars per barrel, which would be unfavorable for the extraction sector, as its profits are correlated with oil prices – the higher the price, the higher the profits.
However, there are significant differences between companies within the industry itself. In recent days, the quotations of companies related to LNG, such as Cheniere Energy and Chart Industries, have risen – the market expects that the new administration will resume issuing permits for LNG gas exports, which could speed up the implementation of projects to build new export terminals. In this context, Poland may benefit, as it consistently increases LNG gas imports.
All this happens when the growing number of electric vehicles and economic problems in China may weaken global demand for oil. Trump plans to reduce funding for renewable energy sources in favor of support for oil and gas, which could slow down the development of modern energy technologies in the USA. The greatest progress in this field was observed during periods of high oil prices, when saving raw materials brought the greatest benefits. Meanwhile, Europe and Asia are investing heavily in renewable energy sources, which could leave the USA behind in the race for the future of energy, especially in the context of escalating tensions between the USA and China. However, falling oil prices could bring benefits to consumers, who would pay less at gas stations.
The paradox of energy sector support policy is not a new phenomenon. During Trump’s first term from 2017 to 2021, the oil sector on the stock exchange halved due to sharp declines in oil prices, despite many investors expecting a positive result for the entire industry. Under Joe Biden’s presidency, investors bet on good results of stocks related to renewable energy sources, but many ambitious projects turned out to be unprofitable, resulting in significant losses. A similar scenario under the Democrat’s term of office also applied to cannabis stocks, as federal decriminalization of cannabis possession, which investors were hoping for, did not occur.
Author: Paweł Majtkowski, eToro analyst in Poland.
Source: https://ceo.com.pl/paradoks-prezydentury-trumpa-szanse-i-zagrozenia-dla-branzy-energetycznej-61772
