The consensus among market participants leading up to the U.S. election linked a Joe Biden win to a bearish outcome for global oil prices and the oil industry. Despite this fear, a rally in global oil prices drove the XOP, an ETF which tracks a basket of U.S. exploration and production equities, to outperform the S&P 500 market index by over 30% since Nov. 6, just a few days after voting results became clear (Figure 1).
We believe this rally was bolstered by positive news on the results of COVID-19 vaccines, with both Pfizer and Moderna reporting higher-than-expected efficacy in quick succession, and with hopes of a rollout to high-risk patients beginning in mid-December.
Biden’s campaign promise to ban approval for new permits on federal lands remains a headwind for exposed producers and their investors. The proposed ban would be especially impactful for operators with large positions in New Mexico’s portion of the Delaware Basin, where the majority of land with high drilling activity is federally owned. As a result, the region has a seen a clear rush to get permits approved (Figure 2).
While the oil markets remain volatile, and we expect a shift in policy stance on environmental topics related to a Biden presidency, the market remains incrementally optimistic that the bottom of this cycle is behind us.
FIGURE 1 | WTI and XOP Compared to the S&P 500
FIGURE 2 | Number of Permits Approved on Federal Lands in New Mexico
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