How To Trade Energy Ahead Of The U.S. Election

Normally I go out of my way to avoid the subject of politics when I write about markets because no matter what I say it will be interpreted as personal bias and probably alienate around half of my readers, or at the very least lead them to dismiss what I might say because it contradicts their own biases. Just in case you were lucky enough to be unaware of it though, there is an imminent election in the U.S. Given where we are in terms of the pandemic and the economy, it will be an important one for energy investors, indeed for all investors, so ignoring it and hoping it goes away just isn't an option.

So, what does the most likely outcome of the election mean for oil and energy?

At the moment, it looks like the most likely result is a big win for the Democrat, Joe Biden. Yes, I know that the polls were "wrong" last time, but the situation now is quite different. Hillary Clinton's poll lead was consistent but narrow, and in most cases within the margin of error. Biden has a double-digit average lead over Trump in national polls and is ahead by a significant margin in most of the swing states. Like it or not, history tells us that makes a Biden win extremely likely.

Traders and investors, no matter what their personal preferences, should always make decisions based on what is, not what they think should be, and when it comes to the future, on what is most likely, not what you might hope will happen. Right now, therefore, it makes sense to evaluate both your strategy and your portfolio on the assumption that Biden will win and formulate a plan on that basis.

That, however, may not mean what you think.

Conventional wisdom would have you believe that a Democratic win is bad for oil. After all, they are the party that is most vocal in their support of alternative energy, whereas Donald Trump has proven himself to be as helpful as he can in terms of deregulation to traditional fossil fuels. Over a long period of time, that analysis may hold, but even for a year or so after the election, should Biden win, the opposite may be true.

First, based on his past actions, Joe Biden is not a radical about to tear down the oil industry. You will hear a lot from Donald Trump about Biden embracing the so-called "Green New Deal", but not from the man himself. His record shows that while he may say what he feels he needs to in order to keep the support of the party's environmentalists he is unlikely to rush through major reforms that could cause job losses. He may announce a major enquiry into fracking, for example, but not an immediate ban, and government enquiries usually take years to even come to any conclusions.

That doesn't mean that he won't quickly reimpose some of the regulations that Trump has repealed of course, but if he does, the impact on oil could well turn out to be positive rather than negative, at least in terms of price. Greater regulation will restrict supply and increase the barriers of entry for small producers, and oversupply as a result of a resurgent U.S. shale boom has been the main reason WTI has stayed so low. In a weird way, what will be perceived as anti-big oil measures will end up benefitting those very companies for a time before they hurt in any way.

Then there is another thing to consider. With Trump defeated, Congress, and in particular the House, will be falling over themselves to pass a stimulus bill. There is nothing a politician likes more than giving away money, and if the stock market's reaction to stimulus news is an indication, that is one of the few things keeping us afloat right now. Another few trillion in handouts will stimulate demand and help asset prices, including crude.

Depending on who you listen to and choose to believe, a Biden Presidency will either destroy the U.S. energy industry or be its savior as it shifts policy to match the inexorable and inevitable global shift to renewable sources. History will tell us which of those is true should he win. Whichever it is though, it will take time for that to take effect, and meanwhile the short-term impact of a Biden win will probably be a positive for oil prices, and therefore for the energy sector in general.

A word of warning, though. Should Biden be declared the winner on November 3^rd or shortly after, the knee jerk reaction of oil traders is likely to be to sell, so you may well see some weakness in the runup to the election and immediately after. Eventually, however, logic will prevail, so buying on any dip around the election with a view to holding for a year or so would be my preferred strategy.