Energy markets focus on US presidential election

Oil prices lost ground last week with Brent futures slipping by 2.7% to settle at USD 41.77/b and WTI falling 2.5% to push it back below USD 40/b at the end of trading. The immediate catalyst for lower prices appears to be market expectation that Libya’s production is going to recover back to pre-civil war levels of more than 1m b/d in the next few weeks, at least according to statements from the country’s National Oil Company. The UN has brokered a ‘permanent’ ceasefire between warring parties in the North African country that will allow the oil company to lift force majeure on its major export terminals. Libya is not bound by the OPEC+ deal to cut production and its oil infrastructure, at least the producing assets, have been relatively less affected by the civil war than some of the midstream infrastructure.

Also not helping oil were comments from Joe Biden in the last presidential debate where the candidate clumsily said he would “transition away from the oil industry.” That Biden is the ‘greener’ of the two candidates isn’t surprising but so far the Democrat has tried to walk a narrow line to avoid dismissing the oil industry as Hilary Clinton seemingly did on coal companies and workers in 2016. Biden later tried to clarify his remarks, saying that the US wouldn’t “get rid of fossil fuels for a long time” although several other Democrats running in oil-centric states have tried to distance themselves from the comments.

Energy and the environment have not been mainstays of the 2020 election campaign but a Biden victory would mean the US re-engages with the Cop 21 Paris climate change accords and accelerates trends already in place thanks to improving economics of renewables in the US energy mix. We would expect to see more of an immediate impact on power markets, with coal and natural gas likely to bear more of the brunt of a green agenda, rather than oil in a first instance. Biden’s energy policies outline the US becoming a net zero emissions economy by 2050 and widespread investment into clean tech (e.g.; electrification or raising energy efficiency). For oil the most immediate effect would be in the form of tighter fuel economy standards and restrictions on where new oil and gas projects can be developed.

A more immediate threat to oil prices in the near term under a Biden administration would be whether the US chooses to re-enter the JCPOA, the Iran nuclear deal, which would allow Iran to resume oil exports. Iran exported just 220k b/d in September, according to market estimates. That compares with more than 2.5m b/d in mid-2018 just as the Trump administration pulled out of the JCPOA. Iran’s oil infrastructure is only being restricted by policy and could recover quickly just at a time when OPEC+ still plans to taper its production cuts in 2021. It is by no means certain that a Biden administration would bring the US back into the JCPOA and Iran’s own presidential election in 2021 may lead to a hardliner winning that pulls the country out of the deal anyway. Nevertheless, it is an outside risk for oil markets heading into next year.

President Trump doesn’t have an articulate energy or climate plan for second term, presumably beyond just doing more of what has been carried out in his first four years. Many of the US energy sector trends—major increases in US production and exports, development of LNG export facilities for instance—had been in place prior to Trump winning the presidency and were responses to market dynamics much more than government policy. Nevertheless, a Trump victory in early November would likely be interpreted as more ‘friendly’ to the oil industry and markets.