Governor Gavin Newsom of California faces pressure to stabilize energy supplies and has proposed easing oil drilling permits. Despite his goal to end oil drilling by 2045, state regulators suggest allowing limited new well permits as a temporary solution. The Trump administration kickstarted a significant review to boost oil and gas leasing on federal lands in California. This move aims to expand fossil fuel development, with the U.S. Bureau of Land Management assessing over 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, potentially leading to hundreds of new wells. Additionally, the federal government has canceled a 2012 agreement with California that allowed for joint permitting oversight on federal land, aiming to streamline federal approvals. This decision points towards less regulation and could increase oil drilling activities in California, despite concerns from state-level environmental advocates. We believe Newsom’s proposal to ease permitting, even with long-term environmental goals in mind, shows a short-term bearish outlook for regional crude prices. This political shift, driven by efforts to stabilize energy supplies while gas prices have recently averaged over $5.15 per gallon according to AAA, opens opportunities for traders. Any rise in local supply—even if small globally—will impact the West Coast market. California’s crude oil production has steadily declined over decades, dropping to about 313,000 barrels per day in early 2024. The federal review of over 950,000 acres of subsurface minerals might temporarily reverse this trend. We see this potential increase in supply as a key factor that could widen the price gap between local crude grades like Kern River and the WTI benchmark.

Volatility In Crude Oil Market

The conflicting signals from state policies, federal actions, and market pressures create considerable regulatory uncertainty, driving volatility in the market. This situation may lead to rising option premiums in the upcoming weeks. We view this as a chance to buy volatility using strategies like long straddles on crude oil futures, expecting sharp price movements in either direction. With this in mind, we are considering strategies that would benefit from a weaker regional market rather than a significant drop in global prices. This might include futures spreads that short West Coast-linked crude contracts while taking long positions in WTI or Brent. The news alone is likely to create trading opportunities, even before any new barrels are produced. Moreover, the ongoing transformation of refineries, such as the Phillips 66 facility in Rodeo, from crude oil processing to renewable fuel production is important. This shift reduces local demand, meaning any new supply from increased drilling could exceed the existing refining capacity. This dynamic suggests downward pressure on local crude prices. Historically, regional supply gluts have resulted in deep and prolonged price discounts, similar to the situation in the Permian Basin before pipeline capacity improved a decade ago. Although the scale may differ, the basic principle remains consistent. We expect similar localized pricing pressure to arise if drilling permits are expedited. Create your live VT Markets account and start trading now.

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