A few days after the presidential election, and markets are still busy digesting how a potentially massive change in U.S. economic policy will affect markets. Oil markets have been fairly stable; the price of oil remains steady under US$45 per barrel.
One thing is clear, however: a Donald Trump presidency will have ramifications for the energy market. Trump’s opposition to the Iran deal, uncertain policy towards the Middle East, massive domestic tax cuts and deficit spending, and deregulation of the energy sector all stand to affect oil prices.
With the oil market in the slow process of rebalancing, there is reason to believe a Trump victory could work to accelerate the rise in oil prices over the short and medium term. If this is true, Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) has plenty to gain.
Baytex sees a larger gain in revenue per dollar gain in oil prices due to the fact that it’s partially a heavy oil producer; heavy oil is discounted to WTI oil prices.
Providing the discount stays fairly stable, heavy oil prices will see a larger percentage gain than WTI as WTI rises. This is partially why Canadian heavy oil prices were up 71% from January to September compared to 42% for WTI oil prices.
This combined with higher debt levels makes Baytex shares very sensitive to a gain in oil prices.
Here’s why a Trump presidency may be tailwind for oil prices, even in the very short term.
Trump’s election will have an immediate effect on OPEC
The oil market is currently being driven mostly by OPEC.
OPEC is meeting at the end of the month to discuss a potential production cut from 33.3 million bpd in August 2016 down to 33-32.5 million bpd.
The market is currently pessimistic on a deal, because OPEC’s second- and third-largest producers (Iran and Iraq) are seeking exemption from the deal. Iran produced 3.6 million bpd in August 2016 and has expressed a desire to grow its production to four million bpd.
A Trump presidency could put these plans on hold.
Iran requires the help of international oil companies to reach its production-growth goals. Before Trump was elected, Iran was having difficulty attracting these businesses due to unattractive contract terms as well as political and economic risk. Sweetening contract terms with Western businesses, however, is politically unpopular in Iran.
As a result, Western oil firms were avoiding Iran, and Trump’s election should scare them away for good. Trump has stated that the nuclear deal with Iran, which reduced sanctions on Iran and allowed Iranian oil production to grow, is a bad deal, and the threat of new sanctions or instability will likely prevent Iran from growing production.
This is good for global oil supplies and prices, and it may also make an OPEC deal at the end of the month easier. If Iran is limited in its ability to grow production, it may be more likely to agree to a freeze or cut.
Trump’s policies should also boost U.S. demand
The U.S. is the largest consumer of crude oil, so U.S. oil demand matters to the price of oil.
Bank of Montreal economists recently stated that Trump’s tax ($6 trillion in tax cuts over a decade) and infrastructure plan could create an upside boost to their 2017 GDP growth forecast for the U.S. They also stated that the risks for a Trump presidency in terms of their growth outlook for the U.S. economy is to the upside.
While there are worries that Trump’s energy plan will rapidly grow U.S. production, it is important to remember that U.S. firms simply can’t grow at whatever rate they want due to high debt levels and prices that are still far too low.
The end result should be stronger oil prices, and Baytex is well set up to benefit.
