How US elections will mark a critical turning point for oil traders and markets
US elections in November will mark a critical turning point for global oil markets. A second term for Trump is expected to signal a continuation and perhaps a further loosening of policies that aims to unleash the US’s full oil and gas energy productive capacity, according to Investment bank MUFG.
In contrast, if Biden is elected, this status-quo “energy dominance” policy under Trump would give way to a significantly more “middle-of-the-ground” strategy anchored between a reengagement in US global leadership towards sustainable energy targets, weighed against US energy dominance policy strategy, Ehsan Khoman, Head of MENA Research and Strategy, said in a podcast.
Energy transition is here to stay, but the pace of evolution could pivot on the US elections. Markets have been surprised by the pace of the sentiment shift towards energy transition in 2020. Critically this is not due to the pandemic per se but rather factors such as, increasing efficiency and the electrification of road transportation, which have been at play long before COVID-19 altered the contours of the global economy – the virus has merely accelerated this eventuality.
“We believe that the US elections will be crucial in determining the next chapter in the energy transition. Biden’s plan to achieve a 100 percent clean energy economy and net-zero emissions by 2050 would present another driver for the transition, particularly if he has the backing of Democratic alignment within the House and Senate,” Khoman said.
UK energy major BP has been one of the first movers among energy producers touting its net-zero carbon goal. According to MUFG, BP’s nearer-term targets by which the market can benchmark the company’s progress towards its 2050 ambitions is impressive, rich in details and enhances the company’s standing towards its long-term strategy.
“A Biden presidency will de-emphasise fossil fuels immediately and would attempt to accelerate the shift to alternative energy, but will also require significant policy implementation with full democratic control of the government,” Khoman said, adding, “Implementation will thus be far from clear-cut but a Biden presidency will mark the moment when the world’s biggest oil and gas producer officially re-joins the global energy transition.”
Oil price implications
Whatever the outcome on 3 November, trading oil will require new ways to assess, quantify and hedge risk.
At face value, a Biden presidency would likely have a greater immediate impact on the back-end of forward curves, since his green policy changes are conditional on largescale buy-in, which will take time.
Whilst oil markets will inevitably trade the election outcome, inauguration will not happen until 20 January 2021.
“Biden’s proposed supply-side policies such as, drilling bans, financing restrictions, pipeline cancellations and production of alternative energy products, are the most ambitious of any presidential candidate in history. Such policy changes will require patience,” Khoman noted.
“We see markets trading this as a more bullish back-end of the curve price development given he is likely to drive some magnitude of a slowdown in future US oil production. At the current juncture, such an outcome remains underpriced and underappreciated, in our view. On the other end of the spectrum, there are large uncertainties on the front-end of the price curve, which are largely bearish,” he said.
Under Biden, prospects of a US rapprochement with Iran are almost certain. This has the prospect of the return of 2-2.5m barrels per day of Iranian crude onto global oil markets.
Given the acute pain that sanctions have inflicted on the Iranian economy, a Trump victory could well be seen as a last hope in negotiating a (likely frontloaded) deal while preserving the government’s position at home, Khoman said in the podcast.
Source: ZAWYA (Reporting by Seban Scaria; editing by Daniel Luiz)