Credefi

May 20, 2025 at 15:55

Cheap oil boosts US growth; Trump’s stance reinforces lower costs

Here's my take on cheap oil and Trump: yesterday we talked about Trump backing cheap oil. But if oil prices fall below $60, most shale projects become unprofitable, so companies cut capex and drilling, and US production could decline. The key is that the US relies more on shale oil, while OPEC+ produces heavier crude. Shale oil is flexible: it can be paused and restarted quickly thanks to hydraulic fracturing, and restart costs are relatively low. Heavy crude requires steady production; stopping and restarting is expensive and difficult. Cheap oil reduces production costs, logistics costs, and helps ease inflation. When oil is cheap, gasoline, electricity, and manufacturing get cheaper in the US. Factories and farms benefit, goods cost less, and people have more money to spend. That fuels the economy: businesses can grow more easily, consumers spend more, and US goods become more competitive abroad. In short, cheap oil with minimal losses is preferable, especially since the oil and gas sector is a relatively small share of US GDP.

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Analysis

Macro thesis: persistently cheap oil supports domestic manufacturing, lowers input costs, and can dampen inflationary pressure in the United States. The author argues that US shale is more elastic than OPEC+ heavy crude, meaning price shocks will more directly affect US production decisions via capex and drilling activity. A price floor near or above $60 is critical for shale profitability; below that, capex cuts may reduce supply in the near term, potentially offsetting some benefits of cheap energy.

Fundamental drivers: (1) shale’s lower breakeven and rapid response to price changes makes it the swing factor in US oil output; (2) heavy crude production requires a steadier, longer-horizon investment, creating a different risk profile for OPEC+ members; (3) cheap oil translates into lower costs across energy-intensive sectors, potentially lifting consumer spending and industrial activity, which can spur inflation moderation and improve external competitiveness.

Implications: sustained sub-$60 oil risks a cyclical tightening in US shale supply, which could cap downside and eventually reprice risk as capex cycles adjust. Conversely, if prices stay above that threshold, shale could expand, reinforcing energy independence and broad-based economic growth. The narrative links political signals (Trump’s stance) with macro economics, suggesting policy alignment could reinforce the upside for domestic oil-related equities and beneficiaries in the broader economy.

Recommendation

Monitor oil prices around the $60 threshold. If WTI remains under $60 for an extended period, anticipate capex reductions in shale and potential near-term decreases in US production, which could tighten supply later and support prices.

For market positioning, consider a cautious tilt toward beneficiaries of lower energy costs (industrials, consumer staples with energy-intensive inputs) if cheap oil persists, while avoiding overexposure to high-cost shale players during prolonged low-price environments.

Stay aware of policy and supply-side catalysts. Any unexpected supply disruptions or geopolitical shifts could quickly alter the balance between cheap energy and production incentives, so maintain flexible exposure and predefined risk controls.

Disclaimer

The Analysis and recommendations provided are for informational purposes only. Any investment decisions should be made at your own risk. Past performance is not indicative of future results. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions.