The energy sector ( ^GSPE ) has outperformed the broader market ( ^GSPC ) year to date from optimism around US President Donald Trump's second term.
University of Houston energy fellow Ed Hirs tells Brad Smith and Madison Mills that Trump's 'drill, baby, drill' rhetoric is not only unlikely to come to fruition but would also likely be harmful to the US oil industry if it did.
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Top energy companies outperforming the S&P 500 so far this year, coming as oil CEOs attended a meeting at the White House on Wednesday afternoon. Here with more, we've got Ed Hirs, University of Houston's Energy Fellow. Ed, it's great to speak with you here. When you look at that chart and you see energy outperforming the S&P 500 in a moment with so much uncertainty about where this market is heading, investors want, who are in on those energy names, want this dynamic to continue. What does the Trump administration have to do to not stand in the way of the momentum of these energy names?
That would be very difficult. You know, keep in mind the energy portion of the S&P 500 has underperformed everything in the S&P 500 for the last dozen years. Uh, the fact of the matter is the US is the high cost producer for oil in the global market. OPEC Plus has increased production, uh, acknowledging the cheating that's been going on. And the target is a much lower oil price. Uh, Trump, during the campaign, said that he wanted dollar 87 a gallon gasoline. Well, that would mean the price of oil would have to be below $50 a barrel. And that will uh, really hammer, uh, oil development uh, across the United States. In the Dallas Federal Reserve survey of the last quarter of 2024, more than 80% of the producers said they, they were not going to consider investing unless they could see a sustained price of greater than $70 a barrel.
So with that in mind, it sounds like drill baby build drill, baby drill would be more adverse actually to some of the companies that have their fiduciary duty to investors as well, to maintain a certain profit margin and and operating margin that they've been able to deliver for years at this juncture.
Yeah, drill baby drill is not going to happen. Uh, the oil execs have have explained that to the president. Uh, Scott Sheffield last week, uh, the the former CEO of Pioneer, who sold his company to Exxon, said that they had run through their tier one uh, uh, acreage. And the the acreage is becoming gassier. Uh, the fact that the the the market is is in favor of the energy stocks right at this moment, really is pointing towards gas and a and a prospect of using more natural gas for LNG exports and for electricity generation. But as we know the backlog for gas turbines is is well out into the 30s at this point. Um, we're not going to be able to pivot that quickly. The LNG facilities that are underway are going to come on incrementally. Uh, we have a huge amount of natural gas that's stranded because of a lack of pipelines. You know, keep in mind that in Trump 1.0, both the Constitution and the Atlantic pipelines were canceled. Um, if those had been in place, we would certainly see a rosier future for some of the gas producers.