Our US Public Policy and Global Commodities strategists discuss
how the outcome of the election could affect energy markets in
the US and around the world.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana
Salvatore, Morgan Stanley's US public policy strategist.
Martijn Rats: And I'm Martijn Rats, Global Commodity Strategist.
Ariana Salvatore: Today we'll be talking about a topic that's
coming into sharper focus this fall. How will the US presidential
election shape energy policy and global energy markets?
It's Thursday, September 5th at 10am in New York.
Martijn Rats: And 3pm in London.
Ariana Salvatore: As we enter the final leg of the US
presidential campaign, Harris and Trump are getting ready to go
head-to-head on a number of key topics. Healthcare, housing, the
state of the economy, foreign policy; and also high on the agenda
-- energy policy.
So, Martijn, let's set the stage here. Prices at the gas pump in
the US have been falling over recent weeks, which is atypical in
the summer. What's happening in energy markets right now? And
what's your expectation for the rest of the year?
Martijn Rats: Yeah, it's a relevant question. Oil prices have
been quite volatile recently. I would say that objectively, if
you look at the market for crude oil, the crude oil market is
tight right now. We can see that in inventories, for example,
they are buying large drawing, which tell[s] you, the demand is
outstripping supply.
But there are two things to say about the tightness in the crude
oil market. First of all, we're not quite seeing that tightness
merit in the markets for refined products. So, get the market for
gasoline, the market for diesel, et cetera. At the moment, the
global refining system is running quite hard.
But they're also producing a lot of refined product. A lot of
gasoline, a lot of diesel. They're pushing that to their
customers. Demand is absorbing that, but not quite in a
convincing manner. And you can see that in refining margins. They
have been steadily trending down all summer.
The second thing to say about the tightness and crude is that
it's largely driven by a set of factors that will likely to be
somewhat temporary. Seasonally demand is at its strongest -- that
helps. The OPEC deal is still in place. And as far as we can see
in high frequency data, OPEC is still constraining production.
And then thirdly, production has been growing in a number of
non-OPEC countries. But that absent flows and the last couple of
months have seen somewhat of a flat spot in non-OPEC supply
growth.
Now, those factors have created the tightness that we're seeing
currently in the third quarter. But if you start to think about
the oil market rolling into the fourth quarter and eventually
2025, a lot of these things going to reverse. The seasonal demand
tailwinds that we are currently enjoying; they turn into seasonal
demand headwinds in four q[uarter]and one q[uarter] -- seasonally
weaker quarters of the year. Non-OPEC production will likely
resume its upward trajectory based on the modeling of projects
that we've done. That seems likely. And then OPEC has also said
that they will start growing production again with the start of
the fourth quarter.
Now, when you put that all together, the market is in deficit
now. It will return to a broadly balanced state in the fourth
quarter, but then into a surplus in 2025. Prices look a little
into the future. They discount the future a little bit
Now, as the US election approaches, investors are increasingly
concerned how a Trump versus Harris win would affect energy
policy and markets going forward. Ariana, how much and what kind
of authority does the US president actually have in terms of
energy policy? Can you run us through that?
Ariana Salvatore: Presidential authorities with respect to energy
policy are actually relatively limited. But they can be impactful
at the margin over time. What we tend to see actually is that
production and investment levels are reasonably insulated from
federal politics.
Only about 25 per cent of oil and 10 per cent of natural gas is
produced on federal land and waters in the US. You also have this
timing factor. So, a lot of these changes are really only
incremental; and while they can affect levels at the margin,
there's a lag between when that policy is announced and when it
could actually flow through in terms of actual changes to supply
levels. For example, when we think of things like permitting
reform, deregulation and environmental review periods and leasing
of federal lands, these are all policy options that do not have
immediate impacts; and many times will span across different
presidential administrations.
So, you might expect that if a new president comes into office,
he or she could reverse many of the executive actions taken by
his or her predecessor with respect to this policy area.
Martijn Rats: And what have Trump and Harris each said so far
about energy policy?
Ariana Salvatore: So, I would say this topic has been less
prevalent in Harris's campaign, unless we're talking about it in
the context of the energy transition overall. She hasn't laid out
yet specific policy plans when it comes to energy; but we think
it's safe to assume that you could see her maintain a lot of the
Biden administration's clean energy goals and the continued
rollout of bills like the Inflation Reduction Act, which
contained a whole host of energy tax credits toward those ends.
Now, conversely, Trump has focused on this a lot because he's
been tying energy supply to inflation, making the case that we
can lower inflation and everyday costs by drilling more. His
policy platform, and that of the GOP has been to increase energy
production across the board. Mainly done by streamlining,
permitting and loosening restrictions on oil, natural gas, and
coal.
Now, to what I said before, some of that can be accomplished
unilaterally through the executive branch. But other times it
might require the consent of Congress, and consent from states --
because sometimes these permitting lines cross state borders.
So, Martijn, from your side, how quickly can US policy, whether
it's driven by Trump or Harris, affect energy markets and change
production levels and therefore supply?
Martijn Rats: Yeah, like you just outlined, the answer to that
question is only gradually. Regulation is important, but
economics are more important. If you roll the clock back to, say,
early 2021, when President Biden has just took office; on day
one, he famously canceled the permit for the Keystone XL
pipeline.
But if you now look back, at the last four years, start to
finish; American oil production, grew more under Biden, than any
other president in the history of the United States. With the
exception of Obama, who, of course, enjoyed the start of the
shale revolution.
Production is close, to record levels, which were set just before
COVID, of course. So, in the end, the measures that President
Biden put in place, have had only a very limited impact on oil
production. The impact that the American president can have is
only -- it's only gradual.
Ariana Salvatore: So, as we've mentioned, expanding energy
development has been a massive plank of Trump's campaign
platform. And listeners will also remember that during his term
in office, he supported energy development on federal land. If
Trump wins in November, what would it mean for oil supply and
demand both in the US and globally?
Martijn Rats: Admittedly, it's somewhat of a confusing picture.
So, if you look at oil supply, you have to split it in perhaps a
domestic impact and an international impact. Domestically, Donald
Trump has famously said recently that he would return the oil
industry to “Drill baby drill,” which is this, this shorthand
metaphor for, abundant drilling in an effort to significantly
accelerate oil production.
But as just mentioned, there is little to be unleashed because
during President Biden, the American oil industry hasn't really
been constrained in the first place.
A lot of American EMP companies are focused on capital
discipline. They're focused on returns on free cashflow on
shareholder distributions. With that come constraints to capital
expenditure budgets that probably were not in place several years
ago with those CapEx constraints, production can only grow so
fast.
That is a matter of shareholder preference. That is a matter of
returns. And regulation can change that a little bit, but not so
much.
If you look at the perspective outside the United States, it is
also worth mentioning that in the first Trump presidency,
President Trump famously put secondary sanctions on the export of
crude oil from Iran. At the time that significantly constrained
crude oil supply from Iran, which in 2018 played a key role in
driving oil prices higher.
Now, it's an open question, whether that policy can be repeated.
The flow of oil around the world has changed since then. Iranian
oil isn't quite going to the same customers as it did back then.
So, whether that policy can be replicated, remains to be seen.
But whilst the domestic perspective -- i.e. an attempt to grow
production -- could be interpreted as a potential bearish factor
for the price of oil, the risk of sanctions outside the United
States could be interpreted as a potential bullish risk for oil.
And this is, I think, also why the oil market struggles to
incorporate the risks around the presidential election so much.
At the moment, we're simply confronted with a set of factors.
Some of them bearish, some of them bullish, but it remains hard
to see exactly which one of them played out. And, at the moment
they don't have a particular skew in one direction.
So, we're just confronted with options, but little direction.
Ariana Salvatore: Makes sense. So, I think
that makes this definitely a policy area that we'll be paying
very close attention to this fall. I suppose we'll also both be
tuning into the upcoming debate, where we might get a better
sense of both sides policy plans. If we do learn anything that
changes our views, we'll be sure to let you know.
Martijn, thanks for taking the time to talk
Martijn Rats: Great speaking with you,
Ariana.
Ariana Salvatore: And thanks for listening.
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