Saefong, Myra P.Barron's (Online); New York (Oct 16, 2020).
The oil market has been preoccupied for months with concerns surrounding weaker demand driven by Covid-19 economic restrictions, but the U.S. presidential election has started to take center stage as traders weigh election-win scenarios and the potential outcomes for the energy sector.
Demand increased from lows in the second quarter, but the "world is still consuming less oil than at the beginning of 2019," says Rob Thummel, managing director at Kansas-based investment company, Tortoise. "Most believe that global oil consumption won't return to 2019 levels until 2022," and traders are "closely watching the resurgence in Covid-19 cases to determine if global demand will retreat."
However, uncertainty over who will win the Nov. 3 election is of growing concern, given the candidates' contrasting energy policy views.
"A potential new administration could ultimately impact oil prices through changes in drilling regulations, policy support for electric vehicles, or a different approach to foreign policy," says Stacey Morris, director of research at index provider Alerian.
A win by President Donald Trump would "lead to more of the same and be more friendly" to oil and natural gas, says Morris. Trump's Republican administration would emphasize "loosening regulations for the industry and expediting the permitting process for new infrastructure."
Trump has been known to challenge science and the idea of global warming. He has taken steps to promote U.S. energy independence and ease regulatory hurdles in the market.
An uncontested Trump victory would mean "business as usual for the oil markets," says Ryan Fitzmaurice, senior commodity strategist at Rabobank. Still, the oil industry would face significant challenges under another Trump term, "given the sharp decline in global travel as a result of the pandemic."
The election of Democrat Joe Biden, meanwhile, may result in more energy-market restrictions.
"Headwinds to U.S. oil and gas production would rise further" under a Biden win, Goldman Sachs analysts wrote in an Oct. 11 research note.
Statements made by Biden suggest his administration may introduce regulations that would increase shale production costs and reduce shale's recoverable resources by limiting federal land drilling and pipeline approvals, the Goldman Sachs analysts say. A Democratic sweep of the House and Senate, meanwhile, could allow for increased federal oversight of shale activity, they say.
An undisputed Biden win might see oil initially fall as the market waits for him to act, possibly banning fracking on federal lands, and removing sanctions on Iran, says Tortoise's Thummel. Iran is home to one of the world's largest proven oil reserves. This month, the Trump administration announced fresh sanctions on major Iranian banks in another move to restrict the country's nuclear pursuits.
If Biden, as president, re-enters the Iran nuclear deal as he has indicated, Fitzmaurice says that would have "huge oil market implications" and potentially "add up to 1 [million barrels a day] to an already bloated market facing a very fragile demand recovery."
Still, under a Biden win, regulations that appear negative for the industry could be offset by some "positive impacts to oil and natural gas prices," as severe regulations would negatively impact domestic energy output, says Morris. An unclear outcome to the election could have a "negative impact on oil prices in the near term," because the market does not like uncertainty, she says.
On Oct. 15, U.S. benchmark West Texas Intermediate crude futures settled at $40.96 a barrel. If prices drop into the low $30s as a result of a contested election or Biden victory, that presents a "good buying opportunity," says Thummel. Signs of a strong economic recovery could send prices higher, and if they rose into the $60s, "then profits should be taken" as there is currently ample oil supply.
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Credit: By Myra P. Saefong