An executive order signed by President Trump titled ‘Unleashing American Energy’ signed on 20 January detailed oil’s importance in restoring U.S. economic and military security. The executive order describes oil as an abundant low-cost resource that has been held back by regulations, and that can now be freed to fuel a renaissance in manufacturing thanks to the cost advantage of cheap oil.
Commodity analysts at Standard Chartered have pointed out that Trump’s view of U.S. oil hinges on several assumptions: that oil is fungible and hence, for example, substitution between foreign heavy crude refined in Illinois and light sweet Permian Basin crude is easy, and the supply curve for unconstrained U.S. oil is highly elastic with a low marginal cost. StanChart says these assumptions are flawed, arguing that the U.S. oil supply curve is likely to remain stubbornly high and steep rather than low and flat.
Last year, a survey by law firm Haynes Boone LLC revealed that banks are gearing up for oil prices to fall below $60 a barrel by the middle of Trump’s new term driven by increased U.S. output. The survey of 26 bankers showed that they expect WTI prices to drop to $58.62 a barrel by 2027, nearly $13 lower than the intraday price of $71.22 at 12.30 pm ET on Wednesday. However, StanChart has predicted that the dramatic slowdown in U.S. oil production growth that we witnessed in 2024 will continue over the next two years.
According to the experts, last year witnessed a sharp slowdown in non-OPEC+ supply growth from 2.46 mb/d in 2023 to 0.79 mb/d in 2024, primarily caused by a reduction in U.S. total liquids growth from 1.605 mb/d in 2023 to 734 kb/d in 2024. StanChart expects this trend to continue, with U.S. liquids growth expected to clock in at just 367 kb/d in 2025 before slowing down further to 151 kb/d in 2026.
Stanchart says the U.S. slowdown and a long tail of declines will keep non-OPEC supply growth well below 1 mb/d over the next couple of years despite some areas of solid growth in Brazil, Canada and Guyana. In other words, there’s no inevitable supply glut coming as many traders feared in 2024.
Stopping Iranian Oil Exports
Earlier, StanChart pointed out that that U.S. policy, and particularly the degree to which restrictions are enforced, has been the key determinant of Iranian output levels.
Indeed, the five main turning points in Iran’s output trajectory have all been associated with changes in U.S. policy. For the past three years, Iran’s exports have been allowed to climb by the Biden administration, with Washington seeing them as a price moderator after the imposition of sanctions on Russia. However, Trump’s US administration is less likely to accept any trade-offs in the enforcement of sanctions, and has vowed to drive Tehran’s oil exports to zero. Well, this might not be the usual Trump bluster: Iran’s output fell from 3.8 million barrels per day (mb/d) to slightly below 2.0 mb/d in the last two years of the first Trump presidency, taking exports close to zero. StanChart says to expect similar downward pressure to be exerted in the second Trump presidency.
Last year, Trump revealed he had previously succeeded in cutting Iran’s oil exports in his first term by linking it to trade; “I told China and other countries, if you buy from Iran, we will not let you do any business in this country and we will put tariffs on every product you do send in of 100% or more.” According to StanChart, Iranian oil is likely to play a key role in Trump’s wider China trade policy agenda. China has been importing Iranian oil indirectly via proxies. According to multiple media sources, the transfers involve a dark fleet consisting of a group of aging tankers that rarely have an identifiable insurer. These transfers can be hazardous, including the danger of spills and collisions, with so many low-quality tankers massed in a narrow trade route with their transponders off. For instance, two such vessels caught fire off Singapore after a collision in July.
Iran’s oil exports started shrinking late last year after a ramp-up in sanctions by the Biden administration froze some ships that deliver Iranian oil to China via ship-to-ship oil transfers off Malaysia and Singapore. China’s imports of Iranian crude oil and condensate dropped by 524,000 barrels per day (bpd) to a four-month low of 1.31 million bpd in November as the sanctions took effect.
By Alex Kimani for Oilprice.com
