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Oil Price Meltdown – Is Trump Setting The Oil Markets Up For Another Bust?

Trump Oval office

President Donald Trump signed several executive orders this week intended to juice the American energy sector, calling for expedited environmental reviews and the advancement of the Keystone XL and Dakota Access Pipelines. He also is trying to erase any sign of climate change by scrubbing government websites of climate data and even any mention of the phrase. No doubt more directives will be forthcoming in the next few days, not to mention the regulatory actions his agencies – EPA and Interior chief among them – will take to remove all restrictions on oil and gas drilling once his nominees get into place.

The panoply of executive action on energy issues could help add new oil supply to the market. Take Dakota Access, for example. Supporters of major pipelines like Dakota Access (and Keystone XL for that matter) tend to criticize environmentalists for protesting the projects by arguing that oil will always find a way to market regardless if a specific pipeline is blocked or not. But that is simply not the case.

The Dakota Access Pipeline will carry at least 470,000 bpd of Bakken crude to existing pipelines in the Midwest, and ultimately to refineries along the Gulf Coast. But without the pipeline, oil producers in North Dakota have to sell their crude at a discount in order to entice refiners to buy less competitive oil that is shipped by rail or truck. Wood Mackenzie estimates that to move oil by rail adds $12 to the cost while shipping it via pipeline only adds $7 per barrel. With crude trading at $50 per barrel these days, the $5 difference is 10 percent of the price – not a trivial figure.

Related: Trump Angers Buffett – To Sign Executive Orders On Keystone, Dakota Pipelines

It is not a coincidence then that North Dakota oil output has declined roughly 200,000 bpd from a peak of 1.22 mb/d at the end of 2014. The absence of adequate pipeline capacity has helped trim the growth of the Bakken, and it has also deepened its losses since the market downturn over two years ago.

According to the Dakota Access website, the pipeline will “eliminate the need for 500 to 740 rail cars and/or more than 250 trucks needed to transport crude oil every day.” As a result, the Dakota Access Pipeline would not only add takeaway capacity for the Bakken, but it would also trim the transit costs, theoretically making the entire basin more economically viable. That would translate to more investment, higher rig counts, more drilling and ultimately increased oil production. This is why environmental groups, among other reasons, are trying to block construction.

Dakota Access is just one of President Trump’s expected initiatives to boost energy production. Others include scrapping regulations on methane, expediting (or gutting, depending on your point of view) the environmental review process for major infrastructure projects, opening up drilling on public lands, and auctioning off more offshore acreage in the Arctic, Atlantic and Gulf of Mexico.

In addition to these energy-specific measures, President Trump’s proposed border-adjustment tax would potentially have even larger ramifications. Eliminating the deductions that companies are allowed to take on their taxes from imports while making exports tax-free will ripple across much of the U.S. economy, and the energy sector is no exception. Related: Cash Strapped Iranian Oil Industry Braces For Trump Impact

The result could be a price premium of about 25 percent immediately for WTI relative to international benchmarks, according to Goldman Sachs, or $10 per barrel. Higher prices will attract global capital, which could boost oil production. Goldman Sachs estimates the border tax could lead to an increase in U.S. oil production by about 1.5 million barrels per day by 2018, twice as much as the investment bank’s forecast without the border tax.

While that seems great for U.S. oil producers, such a scenario would not play out in a vacuum. Higher U.S. output could push down global oil prices, just as the surge in shale caused a price meltdown in 2014, as Liam Denning of Bloomberg Gadfly argues. The appreciation of the U.S. dollar from President Trump’s “America First” economic/energy policies would also push down oil prices. The end result could be higher oil production, but also another market downturn because of oversupply.

By Nick Cunningham of Oilprice.com

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  • Lee James on January 25 2017 said:
    Not sure Mr. trump thinks far enough ahead to anticipate lower oil prices from carefree drilling. He certainly does not factor in increased pollution, or strain on infrastructure, like roads.

    These days the extent of the tight-oil resource seems not to be an issue. I think it a valid question: if we pump like crazy on source-rock oil, what next after the core areas are depleted? The diffuse oil in source rock is over a wide area, but what are the quantities that are economically available?

    Our new administration is good at knee-jerk action; not sure directives are thought through.
  • Dan on January 26 2017 said:
    Nick, Goldman Sachs says the complete opposite. Hmmm, who to believe. Nick or Goldman's research division?
  • John on January 26 2017 said:
    If an additional 1.5 million bpd come from the Bakken or any other U.S. oil fields, then that is 1.5 million fewer barrels per day of oil that need to be imported. Plus those investment dollars would stay within the U.S. economy. Oil transportation by truck and rail is much more accident prone. I really don't see why this is so bad for the U.S. energy sector?
  • Steve Bull on January 26 2017 said:
    Obviously Putin's puppet because what oil-exporting nation (like Russia) wouldn't want oil prices to plummet??

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