Dennis Kissler, BOK Financial Securities

Dennis Kissler is senior vice president of trading for BOK Financial Securities. He is based in Oklahoma City.

This election cycle is anything but ordinary. With the events of the past few months, the U.S. and the financial markets are in entirely uncharted territory. Many industries, oil and gas included, are speculating what a change in presidential administration would mean.

For the oil industry, a Donald Trump win likely would move the production needle slightly, increasing production in some areas that are currently banned. However, the overall impact on global prices would be minimal but skewed to lower.

Company costs, particularly around permitting, would decline, so that oil companies would likely become more profitable. Even so, these companies probably won’t be incentivized to increase production, especially if prices move lower.

We have history to show us that. From 2011 to 2019, oil production in the U.S. more than doubled, growing from below 6 MMbbl/d to more than 12 MMbbl/d. Meanwhile, energy stocks were among the worst performers in the market. As a result, the industry consolidated and focused on returns rather than growth. I believe that mentality will remain in place regardless of who is elected in November.

And what about OPEC? With ample spare capacity, OPEC is managing oil prices, which will most likely remain in a $75/bbl to $90/bbl range for Brent crude. That said, one negative scenario to consider is: If the U.S. truly increases production substantially, will OPEC counter by flooding the market?

If OPEC does so, it would hurt U.S. producers by making it unprofitable for them to drill. Saudi Arabia, the largest and most influential member of OPEC, has used that tactic to gain control of oil prices in the past—most recently, in their oil price war with Russia in 2020.

What about equities?

Then, there’s the impact to energy-related equities. If Trump were to win, it likely would be positive for the valuation of energy-related equities in the near term. Right now, energy equities trade at roughly the price-earnings (P/E) multiple of the market and generate significant free cash flow at these oil price levels. Part of this discount is concern about the terminal value of oil. That is, the question of whether it will be worthless as we move to electric vehicles (EVs) and other ways to generate electricity.

Who wins the White House can help us answer that question somewhat. For example, a Trump victory would boost oil stock valuations and, while use of EVs would continue to expand, the pace would be slow until newer technology or infrastructure is in place.

Meanwhile, having a Trump administration in place again could be negative for solar and wind power, as well as EV penetration. Since White House policy would shift away from being supportive, valuations for solar and wind likely would contract, despite the need for increased electricity coming from EV and data center demand.

Then, there’s nuclear power to consider. We are maintaining a positive outlook for nuclear power-related equities and believe they may thrive in either a Trump or Kamala Harris presidency. The biggest headwind for the creation of new nuclear plants is regulation and cost, and a Trump victory likely would be positive for both.

The bottom line

The biggest impact on U.S. oil providers may not come from who is in the White House, but rather from OPEC. The cartel has adequate spare capacity, so oil prices are likely to remain in a tight range for some time, providing great economics for U.S. producers even as growth remains tepid. However, as mentioned earlier, there is the threat of OPEC feeling threatened and substantially increasing production to flood the market.

If Trump wins, investors likely would bid up the terminal value of oil, which would be positive for energy-related equity valuations. Additionally, the entire fossil fuel complex would likely get a lift should Trump win the election. However, that lift would come at the expense of sentiment for solar and wind power, which probably would drive valuations for those stocks lower.

Meanwhile, nuclear is probably a winner regardless of who becomes president. In fact, in 2023, 50% of Democrat-leaning Americans and 67% of Republican-leaning Americans supported more nuclear power plants generating electricity in the U.S., according to a Pew Research Center poll. That’s the highest level of support for nuclear I’ve ever seen.

No one knows who will win the White House in November, but one thing is for sure: Given the increasing energy demand from artificial intelligence data centers, we’re going to need more and more power in this country that’s reliable and efficient.

Comments