When Donald Trump assumes the presidency again in January, energy prices- specifically for crude oil, gasoline, and natural gas- should experience relative stability. Trump has consistently advocated for increased domestic drilling and energy independence, signaling that his administration would support policies to ramp up U.S. oil production. This approach will drive oil prices down by increasing supply; however, Trump’s business-oriented mindset means he is unlikely to push for policies that keep prices so low that it would diminish profit margins for domestic producers. Given the relatively high production costs for U.S. oil companies, we believe Trump’s policies will aim to keep crude oil prices in a “sweet spot” between $60 and $70 per barrel.

The economics behind this range is simple but crucial. U.S. oil extraction and processing are costlier than in other parts of the world; American oil producers typically need oil prices above $50 per barrel to turn a worthwhile profit. Saudi Arabia and other OPEC members can produce oil for under $10 a barrel, allowing them greater flexibility to tolerate lower prices. For U.S. companies to remain competitive and financially viable, WTI (West Texas Intermediate) crude must stay above the $50 mark.

Additionally, Trump may use domestic oil production (and its impact on global prices) as a bargaining chip when making deals with nations like Russia, Iran, and Saudi Arabia. The question is whether he will opt for the carrot or the stick. Trump could try to drive down oil prices to put pressure on Russia, or he may allow prices to rise as a reward for a peace deal. We think he’ll do both, in a strategic and in a limited fashion so as to not risk damaging the US economy.

By supporting policies that favor domestic drilling but avoiding actions that could flood the market, we believe a Trump administration will have success in keeping oil range bound. Perhaps not as tight as the ideal $60 and $70 per barrel, but a $50-$85 range over the next several years seems quite likely to us. This level not only secures profitability for U.S. producers but also remains affordable for American consumers.

We can look at a recent event to illustrate why the administration is likely to pursue this energy policy. In 2022, geopolitical tensions, like the Russia-Ukraine conflict, pushed global oil prices higher, temporarily surpassing $100 per barrel. These elevated prices spurred renewed interest in U.S. drilling, with rigs coming online to increase production. However, such high prices strain consumer budgets and drive inflation. Additionally, that policy backfired completely as Russian oil revenue soared. A Trump administration, with a priority on economic and geopolitical stability, would likely intervene to ensure prices don’t rise uncontrollably, reducing the likelihood of adverse price swings.

Natural gas, another critical energy source, would likely follow a similar trend. This may be an even stronger lever than crude oil when it comes to negotiations with Russia, which needs access to the European gas market. With Trump’s encouragement for natural gas production and infrastructure development, the U.S. could see abundant supply, leading to stable prices domestically. Given recent and planned future investments in liquefied natural gas (LNG) export terminals, the new Trump Administration is already encouraging exports to Europe and Asia, capitalizing on global demand while ensuring domestic prices remain favorable.

In short, Trump’s potential second term could bring a balanced approach to energy prices. His focus on domestic production is aimed at maintaining a self-sufficient energy market and shielding the U.S. from excessive reliance on foreign oil. However, his business acumen implies an understanding that oil companies need price stability and profitability. Consequently, Trump’s policies would likely keep crude oil prices in a range that benefits both producers and consumers. By maintaining this range, he would strive to keep domestic energy affordable without sacrificing the health of the U.S. energy sector, delivering a pragmatic approach to the energy economy. There will continue to be short-term market shocks that cause short-term volatility, but our long-term forecast is stability.

Matthew Donovan is the Head of Business Development

Matthew is the Head of Business Development for AOCTA. He applies his expertise in strategy and execution to the trading portfolio, as well as to the expansion of the business. This dual role enables him to speak with sophisticated investors in great detail about the firm’s trading strategy and operations. With 20 years in the trading industry, Matthew has a long and impressive track record as an option volatility trader and portfolio manager. After beginning his career in New York, and then spending years in Chicago, Matthew settled in Florida in 2017.