It has been a week now since Liberation Day. The ensuing Liquidation Days have wrought havoc throughout the world. Financial markets are devastated. Slight consolation, if there is any, is that the panic selling is probably over, margin calls have been covered with the cash from the recent massive liquidation of long positions. Informed decisions will be made to assess whether further weakness is on the menu, or some recovery is imminent. Cooler heads will base these decisions on two developments: a short-term one called headlines and medium-term ones, hard data that will reflect the practical impact of tariffs. For now, the former is the dominant price driver. Yesterday’s early rally in equities caused by hopes of US willingness to negotiate with trading partners took a painful handbrake turn when the retaliation of the retaliation was announced. After China announced a 34% import tariff on US goods the response was quick and shocking, a word, which is quickly losing its true meaning. The extra 50% excise duty on Chinese imports brings the cumulative figure to 104% and currently neither party appears to be willing to bow. This is not just a disturbing escalation of animosity between the two biggest economies, it is also a battle about personal pride with blatant disregard for the adverse consequences. The decline continues this morning as reciprocal tariffs came into effect today.

When stocks fall, oil faithfully follows. The two major crude oil contracts shed another $1/bbl yesterday and counting this morning despite the US energy secretary expecting tighter sanctions on Iran (or not). Intriguingly, notwithstanding the continuous sell-off the front-end WTI structure received a handsome, albeit temporary boost from the Keystone pipeline shutdown in North Dakota because of a leak. This key crude oil artery will probably stay closed today. The API report released after the settlement showed drawdowns in crude oil and distillate inventories and a marginal build in gasoline stocks. It should have brought some unexpected relief but as it was laid bare in the past week, it is the unpredictability of the trade war that presently preoccupies the minds of investors. Sharp, corrective rallies must not be ruled out but the risk, shaped by growing fear and anxiety about global recession is tenaciously skewed to the downside.

Growing Discontent

So, can they ‘drill, baby, drill’? After all, a pivotal campaign pledge of President Trump was to achieve US energy independence. The path to this goal was ‘to unleash affordable and reliable energy and natural resources’. As part of this plan orders protecting Alaskan lands from leasing or seeking 50% zero-emission vehicles by 2030 have been revoked and executive orders by his predecessor focusing on climate change have been retracted. Orders banning drilling across 625 million acres of US coastal waters issued by Joe Biden on January 6 this year have also been revoked. The declared target of the administration was, and probably still is, to increase domestic oil production by 3 mbpd. In addition to easing environmental regulations, hastening permitting was also considered to be one of the tools to ramp up production. The idea of incentivizing oil production flies in the face of the goal of lowering oil prices, which, in turn, would mitigate the negative impact of the trade policies and lessen the resultant inflationary pressure.

Oil producers, who supported the second Trump administration during the campaign period, are turning disillusioned after the first two months of Mr. Trump’s presidency. This is the picture, which emerged after the latest Dallas Fed Energy Survey was released on March 26 and the mood likely have gotten even sourer in the past week. It is an influential quarterly snapshot of the sentiment of shale executives active in the southwest. It published data collected between March 10 and 12 from 130 energy companies, 88 of which were exploration and production firms and the rest services firms. Companies are anonymously asked about their business activity, employment, capital expenditure and other indicators and for each category the replies are used to calculate an index.

The broadest measure, the business activity index, declined in the first quarter of the year but remained in positive territory. The company outlook index mirrors slight pessimism as it dipped below 0. Outlook uncertainty amongst executives is on the ascent as its index nearly doubled from the end of last year. The oil production index moved slightly higher, but the cost index also increased, both for services companies and E&P firms, implying inflation. The aggregate employment index and its sub-indices, such as employee hours and wages and benefits index were all mainly unchanged quarter-on-quarter.

Respondents expect the price of WTI to be around $68/bbl in the next 6 months, rising to $70/bbl in a year’s time and to $82/bbl in 5 years. (Again, downward amendments would not come as a complete shock given the latest price drop.) Most see a $45/bbl price to cover expenses for existing wells and $66/bbl to drill a new well profitably. 
Beyond these dry numbers, the comment section of the survey is probably the most indicative of the atmosphere amongst E&P and services firms. These comments have been edited for publication. The key word, respondents say, is uncertainty. Below are a few of the observations from executives:

• The implied cost of capital has risen, and public energy stocks have fallen harder in the last two months than oil prices. 
• There cannot be US energy dominance and $50/bbl oil; those two statements are contradictory.
• Trade and tariff uncertainty make planning nearly impossible.
• Lack of stability is a recipe for a disaster in the commodity markets. ‘Drill, baby, drill’ is a myth and a populist rallying cry.
• In case of renewed price weakness production will be shut in. The rhetoric from the administration is not helpful.
• Contemporary geopolitical developments and the repercussions of tariff policies mean that the pause button on spending will be pressed.

Given the whirlwind nature of policymaking in the current US administration, jumping to hasty conclusions always carries an element of healthy risk as a decision can be reversed in the blink of an eye. The latest survey and the candid comments, nonetheless, suggest that oil executives have, so far, been disappointed with the Trump apparatus and consequently, a significant increase in US oil production is in the cards – unless oil prices undergo a sustained recovery but again, it would probably be deemed a political suicide.

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