Bearish winds for Oil: Can prices hold above $70 amid Trump's pro-drilling agenda?

Oil markets are navigating choppy waters as prices dip for a second consecutive day, raising concerns about whether they can maintain levels above $70 per barrel. 

The inauguration of President Trump’s second term has brought renewed focus on his pro-drilling agenda, which many analysts believe could weigh heavily on the market. Brent crude slipped to $79.49 per barrel, while WTI crude fell to $76.68, reflecting a market grappling with oversupply fears and structural inefficiencies.

Trump’s drilling agenda and market uncertainty

President Trump wasted no time in making his energy ambitions clear. On his first day back in office, he signed executive orders lifting restrictions on oil drilling in the Arctic and large swathes of U.S. coastal waters. While these actions align with his "Drill, Baby, Drill" mantra, they have stoked fears of an oversupplied market. 

Many traders are taking a cautious stance, with PVM oil analyst Tamas Varga noting that profit-taking is emerging as market participants await clarity on the administration's energy policies. However, a surge in U.S. oil production appears unlikely in the short term. The latest Baker Hughes survey reported a decline in active oil rigs to 478, just one rig above its post-pandemic low. Despite the policy push, U.S. oil companies remain wary of ramping up production. 

Low real-term oil prices and rising operational costs have dampened the incentive to drill, with many companies prioritizing shareholder returns over expansion. Over the past two years, major oil firms like ExxonMobil and Chevron have borrowed billions to fund share buybacks and dividends, further limiting their capacity for capital investment.

Source: Bloomberg, Financial post

Structural challenges and global dynamics

While domestic policies weigh heavily on market sentiment, global factors add complexity to the equation. New sanctions on Russian oil are expected to displace around 500,000 barrels per day over the next six months, according to Standard Chartered. 

Russia is likely to employ shadow fleets and ship-to-ship transfers to bypass these restrictions, adding a layer of uncertainty to supply projections. Meanwhile, OPEC+ has remained steadfast in its output discipline, delaying planned production increases until April 2025 and extending production cuts through 2026. These measures aim to prevent an oversupply scenario but may offer only temporary relief to prices.

Source: Standard Chartered

U.S. shale production, once the backbone of rapid supply growth, faces its own set of challenges. Despite record output of 13.4 million barrels per day in August 2024, production gains have slowed dramatically. Technological advancements, such as multi-pad wells and longer lateral drilling, have allowed for efficiency gains, but these innovations are reaching their limits. 

The Permian Basin, a cornerstone of U.S. shale, is showing signs of geological maturity, with rig counts declining nearly 15% since their 2024 peak. Goldman Sachs predicts that the Permian rig count could fall below 300 by the end of 2025, further dampening production growth prospects.

Adding to the bearish outlook is the broader shift in industry strategy. U.S. producers have embraced capital discipline, favoring shareholder payouts over aggressive expansion. This paradigm shift, coupled with structural challenges and cost inflation, underscores the difficulty of sustaining long-term supply growth.

Can $70 hold amid mounting pressure?

The $70 per barrel threshold remains a critical psychological and economic marker for the oil market. While geopolitical disruptions, such as Russian sanctions, and OPEC+ discipline provide some support, they may not be sufficient to counterbalance the bearish pressures emanating from the U.S. oil sector. The combination of restrained drilling activity, maturing shale fields, and cautious producer strategies creates an environment where prices could struggle to find solid footing.

For now, the oil market’s trajectory depends on a delicate balance of supply and demand dynamics. Trump’s aggressive drilling agenda may promise increased output, but the structural realities of the industry and the global market’s fragility cast a long shadow over its potential impact. As bearish winds continue to blow, the question remains: can oil prices stay above $70, or are further declines on the horizon? The coming months will likely provide the answer as market forces and policy decisions collide.

At the time of writing, Oil is holding just below the $76 mark with bearish pressure evident. However, prices staying above the moving average indicate that buy pressure still remains. RSI appearing flat around the midline hints at stalling momentum which could see a consolidation in the price of oil. Buyers could find resistance at the $77.11 and the $79.18 price levels. If bearish conditions prevail, sellers could find support at the $75.00 and the $73.71 price levels.

Source: Deriv MT5

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