Governor Gavin Newsom of California is experiencing pressure to stabilise energy supplies, prompting a proposal to ease oil drilling permits. Despite his commitment to end oil drilling by 2045, state regulators suggest limited new well permitting as a transitional measure.
The Trump administration initiated a significant review process to revive oil and gas leasing on federal lands in California, marking a major move towards expanding fossil fuel development. The U.S. Bureau of Land Management is considering more than 684,000 acres of surface land and 959,000 acres of subsurface minerals across 17 counties.
Oil Drilling In Kern County
This includes heavily drilled Kern County and parts of the Bay Area, which could lead to hundreds of new wells. Additionally, the federal government has rescinded a 2012 agreement with California, which allowed joint permitting oversight on federal land, aiming to centralise and expedite federal approvals.
This decision signals a shift towards less regulation, potentially increasing oil drilling activities in California, despite state-level environmental concerns.
We believe the proposal from Newsom to ease permits, despite long-term environmental goals, signals a short-term bearish sentiment for regional crude prices. This political shift, driven by pressure to stabilize energy supplies with gas prices in the state recently averaging over $5.15 per gallon according to AAA, creates an opening for traders. Any increase in local supply, even if marginal on a global scale, will directly impact the West Coast market.
California’s crude oil production has been in steady decline for decades, falling to around 313,000 barrels per day in early 2024. The federal evaluation of over 950,000 acres of subsurface minerals could potentially reverse this trend temporarily. We see this potential supply increase as a catalyst that could widen the price differential between local grades like Kern River and the WTI benchmark.
Volatility In Crude Oil Market
The conflicting signals between state policy, federal actions, and market pressures create significant regulatory uncertainty, which is a key driver of volatility. This environment suggests that option premiums may rise in the coming weeks. We view this as an opportunity to purchase volatility through strategies like long straddles on crude oil futures, anticipating sharp price movements regardless of the ultimate direction.
Given this, we are considering positions that would benefit from a weaker regional market rather than a major drop in global prices. This could involve futures spreads that short West Coast-linked crude contracts against long positions in WTI or Brent. The headlines alone are likely to create trading opportunities before a single new barrel is even produced.
Furthermore, the ongoing conversion of refineries, such as the Phillips 66 facility in Rodeo, from crude oil processing to renewable fuel production is a critical factor. This structural reduction in local demand means any new supply from increased drilling could overwhelm the remaining refining capacity. This dynamic strongly suggests downward pressure on local crude prices.
Historically, regional supply gluts have led to deep and sustained price discounts, as seen in the Permian Basin before pipeline capacity caught up a decade ago. While the scale is different, the fundamental principle remains the same. We anticipate a similar, albeit localized, pricing pressure to emerge if drilling permits are indeed fast-tracked.
