US president Donald Trump's effort to keep oil prices low and uncertainty over the outcome of tariffs may lead to a reduction in US oil production budgets and hinder investment, delegates said at S&P Global Commodity Insight's Appec conference.
US production will likely not come off this year because capital expenditure budgets were already set towards the end of last year and rigs have been deployed, Trafigura's chief economist Saad Rahim said at the conference on 8 September. But US drilling rig counts have dropped, falling to the lowest level in four years at the end of August because US producers have slowed drilling activity on the back of oil price volatility. "While you won't see the drop yet [in US production] because there is a six- to eight-month lag, I think you are going to see production start to stall at these levels and then potentially come down," Rahim added, especially if oil prices fall below producers' breakeven levels.
The breakeven price across all major producers is now $60/bl at the lowest according to the Federal Reserve Bank of Dallas, and if oil prices fall below that level in the next few months, companies setting their capital expenditure budgets for next year may have to plan accordingly, Rahim said.
Opec+ unwinding cuts and China potentially not being able to absorb all the surplus, also coming from supply increases elsewhere such as in Brazil and Guyana, have dampened some market outlooks on oil prices going into next year.
"We've seen quite a decent flow of hedging from US producers because the outlook is so bearish for next year… [so] they went into the market to cover their price risk exposure," trading firm Gunvor's global head of research and analysis Frederic Lasserre said.
Tariff uncertainty
It is difficult for companies to plan around such volatility, made worse by uncertainty over the outcome of US tariffs. The US Court of Appeals for the Federal Circuit, in a split 7-4 ruling on 29 August, affirmed a lower court order from May that said Trump did not have the authority to unilaterally impose tariffs on most goods imported into the US. Trump's administration has asked the US Supreme Court to schedule a hearing in early November to hear the appeal of the court ruling.
New, higher US tariffs on a broad range of trading partners came into effect on 7 August, six days later than a previously announced 1 August deadline.
"I think the market is assuming that the court will still rule in Trump's favour, but there is a tail risk that they overturn that. And then if you suddenly announce a big project, you're putting dollars in, does that make a difference?" Rahim questioned.
US mid-term elections are also happening in 2026 and the next US presidential election is in 2028, and people are already starting to consider these factors. "Do you want to put a lot of dollars in and then, ultimately, steel in the ground… when a lot of this maybe gets changed?" Rahim added.
The fiscal situation in countries like the US, Japan, France and the UK is also sending a warning signal that investors are not willing at the moment to finance this kind of deficit, Lasserre said. "For a company to invest in this context where you're not sure about taxes, you're not sure about the rates and so on… the climate is very, very negative."
