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“Christmas has come early for the oil and gas industry,” said Bob McNally, president of consulting firm Rapidan Energy Group.
“ The punches of the mother of all ”
The resurgence makes sense given that U.S. oil prices soared 27% in November, marking one of the best months in history. (The record was set last May when crude rose 88% after falling below zero the month before.)
“When people want to take risks, they look to the hardest-hit industries first,” said Daryl Jones, research director at Hedgeye Risk Management. “Energy was the most washed out sector.”
The pandemic has caused an unprecedented collapse in demand for energy, with millions of Americans stranded in their homes. Energy profits plummeted, job layoffs increased and stock prices rocketed.
“For the oil industry, Covid was the mother of all punches,” McNally said.
The hope is that highly effective vaccines, once distributed, will encourage more mobility. And more people flying and driving is a prerequisite for a full recovery in the energy industry.
But the energy rally is not just about vaccines and reopening the economy.
No blue wave
Investors are also heaving a huge sigh of relief that Democrats failed to sweep the election – an outcome that seemed to be in the cards just a few months ago.
A blue wave – in addition to a pandemic – would have been disastrous for the oil industry because Democrats pledged to step up regulation to tackle the climate crisis.
“It’s not dodging a bullet,” McNally said. “He dodges a cannonball right at their head.”
If Democrats had taken decisive control of the US Senate, they would have been prepared to pass sweeping climate legislation. The biggest threat to Big Oil would have been to remove tax breaks from the fossil fuel industry.
“The stars have been aligned to take a bite out of the oil and gas industry’s record. It’s gone now, ”McNally said.
Even if Democrats sweep both second-round races in Georgia next month, US Senate control will be a 50/50 draw, with Vice President-elect Kamala Harris breaking a deadlock.
Any upcoming drilling restrictions?
That’s not to say that the oil industry is completely out of Washington’s sights.
Biden proposed a more moderate measure: ban new oil and gas permits on public lands and waterways. But Biden wants to achieve net zero emissions by 2050 at the latest, a goal that would almost require a significant drop in fracking.
And then there is OPEC. The fall in oil prices this spring was in part due to the price war between Saudi Arabia and Russia.
If OPEC cuts collapse, it will put further pressure on crude prices and oil inventories.
The rise of ESG
The big picture, the oil industry still has a huge climate problem, which cannot be solved by OPEC, vaccines or elections.
For Big Oil, that means lower valuations, higher borrowing costs, and continued pressure from shareholders to push them to decarbonize.
“Navigation is not easy,” McNally said.
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