How To Play The Trump Election In Oil & Gas?

Given what we know from the seemingly eternal Presidential election campaign it would seem that the answer to the question “What does Trump’s election mean for energy?” is an obvious one. As a candidate Donald Trump often referred to “…unleashing the power of America’s oil, gas and coal reserves…” and made it clear that his administration would be focused on traditional fossil fuel energy. The obvious conclusion from that is that we are about to enter a boom period for the energy markets and indeed stocks such as Exxon Mobil (XOM) and Chevron (CVX) have jumped over the last couple of days. The reality, though, may be somewhat different.

Energy is actually one area where a President, through their control of the EPA which regulates the industry, can really make a difference, but ultimately the energy industry still produces a commodity, so it is the market, not the politicians, that will set the tone. If Trump does what he says he will do and opens up Federal lands to drilling, roll back regulations on fracking, and encourage rather than opposes new pipeline projects it will certainly enable production and, to some extent, cut the costs of bringing some American oil to market. That doesn’t mean, though, that the immediate prospects for large integrated oil companies have improved.

First and foremost, all of those things will take time. Pipelines are not laid overnight, nor do new wells gush immediately. The longer term effects of a pro fossil fuel policy will continue the move towards American energy independence and secure the long term future for the likes of Exxon, but over the next few months the prospect of increased production could have a detrimental effect on the most important influence on those companies’ profitability, the price of oil and natural gas.

I should make it clear that I am not talking about in the next few weeks. In fact I recently bought both UWTI and UGAZ, the triple leveraged bull ETFs for WTI and natural gas. There are other technical and fundamental factors that convince me to maintain those positions, such as proximity to key supports in both markets and the expected effects of the large capex cuts instituted by almost all E&P companies, but if Trump does what he says he will do the boost from those factors will be relatively short lived.

The simple fact is that the price of any commodity is basically determined by supply and demand, and the above policies would add to an already excessive supply in the U.S. It could be that demand will increase, but other, non-energy related Trump policies, such as the abandonment of free trade deals, make a real surge in global economic activity unlikely. Protectionism may help some American industries but oil is a global commodity, and any American advantage that ensues will probably be offset by the negative effects on other economies.

It seems then that energy investors should not get too carried away following Trump’s win. It is probably a good thing for those that hold energy stocks for the long term as oil and gas companies will feel more secure in making investments for the future, and long term growth in the industry looks more likely now than it did a few days ago. It may well be though that encouraging additional supply to a market that already has a glut of both oil and natural gas will, come the New Year, force prices, and therefore energy stocks, down. At that point I would be a buyer, but for now caution is the best approach.