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But not for the reason you might think

Joe Biden is getting some attention in the final stretch of the US election for his comments about banning fracking on federal land and cutting subsidies for fossil fuels.

He may be the anti-oil candidate but even if that’s his intent, the reality will be just the opposite.

First, there’s little doubt that he would make the operating environment more difficult for oil companies. Regulation is coming regarding flaring, venting and drilling. While the aim is to benefit the environment, the result might be that it’s a big win for the global oil industry, including the American drillers who can adapt.

All the commentary surrounding the oil industry at the moment is about declining demand due to renewables. That’s an important long-term story but the narrative that’s being overlooked is medium-term supply.

US production has fallen to 11 mbpd from 13 mbpd this year. It’s likely to fall another 2 mbpd by the end of 2021. That’s coming no matter who is in the White House because of low prices, high decline rates in shale and a lack of new drilling.

It’s a similar albeit less-stark story globally as capex budgets have been cut around the world and that’s going to mean materially less supply over the next two-to-five years. That’s happening as global operating field output falls at a 2-6% pace each year.

That oil is simply not going to be replaced. The pandemic will end and when it does, demand is going to rebound. There are some inventories to run off but afterwards there is a growing threat of a supply shortage.

Of course OPEC returning and an Iran deal could mitigate some of that but there will still be a shortage of supply. Add in a President who is going to make it difficult to produce oil and an investment climate that’s demanding returns to shareholders ahead of new drilling and there’s big opportunity in oil.

Before that though I think we will see:

  1. A knee-jerk lower in oil companies on a Biden win
  2. Further tax-loss selling of oil companies into year end
  3. The potential for a final flush in oil prices to as low as $20 on more OPEC supply or rising COVID cases

At some point, I think that sets up a magnificent trade in oil and oil companies. As always, the trick is getting the timing right.

WTI chart

In terms of politics, I think the resulting high gas prices could be one of the things that dogs Democrats in 2022 or 2024 but ultimately high oil prices will to boost investment into alternatives and that will help Democrats accomplish their goals more than any new policies.

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