This week has seen a number of important developments regarding US oil policy, production and the future of Russia’s policy of capping oil prices. Traders should be aware that these developments may affect the markets.
1. United States Midterm Election Results
Although some election results are still being counted, it appears that the Republican Party won a narrow majority in the United States House of Representatives, but did not win a significant enough victory to make a difference. management. It is likely that Republicans will take control of the US Senate, but that remains uncertain. In energy policy, that means if politicians vote along party lines, the Biden administration won’t be able to pass a windfall tax on oil companies when Congress next convenes. Oil traders should expect that even if Republicans take control of the Senate, the Biden administration will continue to use its control over the executive branch and bureaucracy to block oil and gas production. Unless the courts decide, we won’t see any more auctions of oil and gas leases on federal lands. Under these conditions, oil companies are unlikely to expand drilling beyond what they currently plan.
2. US Domestic Oil Production Forecast
Many US independent oil producers (such as Diamondback Energy (NASDAQ: ), ConocoPhillips (NYSE: ), Occidental Petroleum (NYSE: ), Pioneer Natural Resources (NYSE: ), Laredo Petroleum (NYSE: ) and SM Energy (NYSE: : )) published. An area to watch out for is oil production in the fourth quarter of 2022 and 2023. Although U.S. production increased this year and is approaching pre-pandemic levels, growth appears to be stabilizing and production may even decline in 2023. Last quarter, the Dallas Fed’s energy survey found that manufacturers viewed rising costs due to inflation and supply chain issues as the main sources of uncertainty. These and other issues, such as rapid decline rates, affect all oil industry producers. Many of them expect their production to increase at lower rates or even decrease.
3. Evolution of the oil price limit
The US and the EU have announced an important event regarding the oil price restrictions they plan to impose against Russia next month. They announced that their price limit will apply only to the first point of sale of Russian oil. The price cap policy prohibits parties buying Russian oil above the price cap from accessing US and European shipping, insurance and banking infrastructure. The actual ceiling price has yet to be determined. This means that Russian oil can be sold all over the world at any price, or further converted into products that can be sold at any price. This makes Russian oil more attractive to countries such as India, China, Turkey and Indonesia. Not only can these countries continue to buy Russian oil for their domestic needs, but they can potentially buy more Russian crude oil and trade it on the world market or convert it into products they can sell on the world market. If they negotiate with Russia at a price equal to or below the ceiling, it will be easier to transport this oil. Oil will become even easier. Of course, Russia can always refuse to sell its oil at the ceiling price. Until the price is announced, it is very difficult to predict what will happen with the policy taking effect.