GEOPOLITICS & OIL PRICE IN A TIME OF TRANSITION

“In addition to being good for our economy, boosting domestic energy production is in America’s national security interest. President Trump is committed to achieving energy independence from the OPEC cartel and any nations hostile to our interests. At the same time, we will work with our Gulf allies to develop a positive energy relationship as part of our anti-terrorism strategy.” Is an abstract of the publication on the White House web site on President Trump’s “America First Energy Plan”

Is this statement contributing to keeping the price of oil below $55?

The statement by the new Trump Administration is extremely ambitious as we currently import about 3 Million barrels a day but we should keep in mind that with Mr. Rex Tillerson* in the Cabinet, the Trump Administration has a lot of credibility when it comes to Oil geopolitics. Is it practically possible-not overnight- but over a certain period of time probably but it would require a price above $55/$60 a barrel to really incentivize all US operators to invest in infrastructure and US banks to start to lend again to the industry.

However, a few interesting signs are here to be noticed. the U.S. rig count reported last week by Baker Hughes is significant. Oil rigs rose by 29, the biggest jump in nearly four years, lifting them to 551.

Permian Basin, which saw two giant acquisitions in recent weeks, saw oil rigs climb by 13. Noble Energy has bought Clayton Williams Energy for $2.7 billion, to grow its presence in the Permian Basin. The acquisition included 71,000 acres in the core of the Southern Delaware Basin - part of the Permian.
Secondly, Exxon announced that it is exchanging $5.6 billion in stock for approximately 275,000 acres of Fort Worth, which will double its holdings in the Permian Basin. The deal is being done with the Bass family, with the prospect of an additional $1 billion in 2020, dependent upon how the acreage performs.
Finally, the drilling productivity report from the EIA projected Permian oil production will increase by 53,000 bpd next month, as the leading shale play has nimbly responded the oil rally in recent months:

The rig count in the basin is now up to 281, more than double its low in May of last year at 134. Nonetheless, it is still half of what it was at its peak in late 2014 at 568 rigs. Permian Basin now accounts for a half of all rigs put to work in the U.S.; given improving efficiencies, it should come as no surprise that production from the leading basin is on the rise once more. So, 3 Million barrels a day not yet but the USA are certainly on the road to additional drilling, like one famous politician put it a few years ago, “Drill baby, Drill” is the tune of the new Trump Administration.

At the same time, Imports from the Middle East averaged over 1.8mn bpd last year. With Saudi counting for 1.1mn bpd, Iraqi volumes climbed over 430,000 bpd. OPEC nations seems to clearly keeping with their Vienna agreement but the resurgence of drilling in the USA might be putting the “brake” on an additional increase in pricing.

As we wrote a few months ago, OPEC and Saudis are ready for a higher price but keeping the price below $55 might be a geopolitical decision to protect from US Oil companies that need about $55 to breakeven on their drilling costs.

Everyone needs $60 a barrel but Supply & Demand and economic market are controlled by geopolitical interest. It will be interesting to see what will be the next move of the Trump Administration to support US operators to reach the 3 Million barrels per day the USA needs to reach energy independence.

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* Mr. Rex Tillerson is the former CEO of Exxon Mobil

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