Trump, Oil, and the Paris Accord: OIH

There are two major takeaways from Trump's decision to pull out of the Paris accord so far, but there is a third that seems to be lost in the shuffle.  That third point is extremely important to investors were measuring the supply and demand for oil going forward.

Pulling out of the Paris accord could easily be considered a PR nightmare, but it is exactly what Donald Trump said he was going to do before he was president, and it feeds right in to his agenda to deregulate and increase competitiveness.  As much as the media and the left hand side of the spectrum took potshots wherever they could, Wall Street actually rallied, suggesting that businesses were embracing this decision.

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Businesses are embracing the deregulation agenda, which was the first of the two obvious takeaways so far.  The second pertains more directly to oil.

Lower regulations reduce costs, businesses have embraced this decision, but oil producers also reap the same reward, and their costs to produce oil conceivably declines with reduced regulation as well.  This caused oil prices to decline sharply starting late in the day on Thursday, and WTI fell by about 3.5% between then and early Friday.  The declines were surprising because positive news came just before in the form of larger drawdowns and domestic stockpiles.

However, the focus of the oil industry is on domestic production, so far at least, and production could conceivably increase as a result of Trump exiting the Paris accord.  That's why oil prices fell.

The third takeaway, which seems to have thus far gone unnoticed, is the demand side of the energy equation.  Exiting the Paris accord opens the door for reversing the auto emission standards imposed by Obama.

In addition, something that has not yet been considered is the fossil fuel mandates that kicked in back in 2009.  These required refiners to use a significant amount of fossil fuels to help reduce greenhouse emissions and to help reduce the US dependency on oil.  The regulation served to significantly reduce net oil demand in favor of fossil fuels.

In the chart below I show the oil input vs. output from refiners excluding fossil fuels on a weekly basis.  We would expect output to be less than input if oil was used exclusively, as was the case prior to 2009.  Output was lower by about 1.25 million barrels/week on average before 2009.

However, in 2009 that turned on its head, when fossil fuels were required, output was higher than input, and has averaged about 0.75 mbw since then.

This regulation reduced US demand by about 2mbw, or about 8 million barrels per month.  It was significant, it has helped reduce emissions and oil dependency, but it also is a regulation that can now be in jeopardy. 

In light of all the media attention surrounding the Paris accord, the real news might come from subsequent action by the President that significantly changes US demand for oil. 

Demand may be set to increase.  It all depends on what he does now that the Paris accord decision is no longer impeding his deregulation efforts. 

Watch US refiners, XOM, CVX, and OIH.

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