An America led by Donald Trump signals a paradigm shift for the oil market. His recent criticism over Republicans’ proposed border adjustment tax plan has already shaken oil trades. At an interview with Wall Street Journal, Trump described the plan, which aims to tax imports and exempt exports, as “too complicated”. The plan, if adopted, would raise the price US refiners pay for Brent crude oil, as well as that for WTI crude oil due to higher demand. WTI-Brent Spread has widened to levels not seen since December 2015 earlier last week, on anticipation of such plan.
As soon as inauguration of Donald Trump is completed, the White House website has been updated with the President’s America First policies. Concerning the energy plan, Trump’s administration pledges to lower energy costs for Americans and to maximize the use of American resources, with the ultimate goal of freedom from dependence on foreign oil. The government declares that it would make use of “the estimated US$50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own”. It targets to achieve “energy independence from the OPEC cartel and any nations hostile to our interests”.
US’ policy to achieve less expensive energy signals increases in US output ahead. Indeed, recent increase in crude oil prices already encouraged shale investment. Baker Hughes estimated that the number of oil rigs jumped +29 units last week. The number of active US oil rigs is now 41 more than the same week last year. The trend appears to have justified OPEC’s long-term fear that its reduction in output would only help US’ gain in market share, instead of boosting world oil prices.
Besides, crude oil, the government also mentioned exploration of domestic natural gas reserves. Consultancy Wood Mackenzie forecasts that US LNG exports will soar by three times to about 11M tones this year. The Nymex natural gas contract plunged -4.87% on Friday on Trump’s energy policy. For the week, the futures declined -6.29%, settling at 3.2%. This was despite the huge decline in inventory. The EIA reported that US natural gas storage plunged -243 bcf to 2 917 bcf in the week ended January 13. Stocks were -431 bcf less than the same period last year and -77 bcf above the five-year average of 2 994 bcf. Separately, Baker Hughes estimated that that the number of gas rigs added +6 units to 142 in the week ended January 20. In terms of drilling types, directional rigs gained +1 unit to 60, horizontal rigs added +22 units to 559 and vertical rigs added +12 units to 75. Together with the 29-unit increase in the number of oil rigs, the total number of rigs rose +35 units to 694.
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