Oil markets feared that a Biden victory will lead to a price crash given his clean energy agenda, yet, prices have only been affected by U.S. election uncertainty during the past weeks. Now a Joe Biden presidency is almost a certainty, equity markets and risk assets including oil are rallying.
Adding fuel to the fire, markets have been bolstered by the announcement of a potentially effective vaccine by Pfizer and Moderna and talk about an extension of current OPEC+ output cuts. News about an extension of OPEC+ cuts came as the markets are digesting the news of new lockdowns in Europe and a major rise in Libyan crude production. Despite these bearish facts, oil prices, last week, rose by more than 10% following the vaccine news and bullish rhetoric from the Saudi Energy Minister.
Libyan crude oil output is currently said to stand at 1.1 million bpd, a sharp rise recorded in less than two weeks since production was resumed. We expect that Libyan production will continue to rise to 1.3 million bpd within the next couple of weeks. Possible OPEC production quota may be imposed on Tripoli if its production reaches 1.7 million bpd.
The Biden victory will bring new market factors
The Biden victory will introduce a couple of new variables to the oil markets over the next four years. Biden has already pledged, in a tweet, to return to the Paris Climate Agreement within the first 77 days of his presidency, in a response to President Trump executive order to officially withdraw from the agreement. That decision means that the United States will increase its investment in clean energies and reduce carbon emissions to meet climate targets.
Furthermore Biden has pledged to freeze licensing for hydro-fracking projects on federal lands, which may cap growth in the U.S. shale patch, and potentially reduce global oil supply. Initial estimates suggest that U.S. shale oil production could be reduced by 300,000-500,000 bpd as a result of this decision. This policy could also lead to higher crude oil prices especially as the world recovers from Covid-19 over the next few years. Related: Blackrock and Fidelity Are Betting Big On This $130 Trillion Mega-Trend
On the other hand, Biden may return to the Iran nuclear agreement which could lead to easing of U.S. sanctions on Iran, bringing back more than 2 million bpd of Iranian crude oil into already oversupplied markets. Although analysts are divided about Biden's Iran strategy, any increase in Iranian oil exports will put additional bearish pressure on crude oil prices in 2021. Uncertainty over a new U.S. Iranian deal may be amplified by new undeclared nuclear activities in Iran, including a newly built underground nuclear enrichment facility, which has not yet been inspected by nuclear watchdog IAEA. Next to this, Iranian elections are set to take place in 2021 and the results of these elections are also expected to impact the US-Iranian dialogue.
Biden victory isn't expected to impact the OPEC+ agreement
Biden isn’t expected to have a material impact on the existing OPEC+ agreement, and is expected to have less of a direct impact on crude prices.
Meanwhile, we expect OPEC+ to make a recommendation to extend the current cuts well into 2021, which will be decided when the group meets on November 30th. A statement from the Saudi energy minister has already pointed out the possibility of a three-month or even a longer extension. Saudi Energy Minister Prince Abdulaziz has not discarded the possibility of deeper cuts, yet as long as prices remain above $40 we expect this to be a less likely scenario.
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By Yousef Alshammari for Oilprice.com
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And while President-elect Biden has greener goals for US energy, he will still ensure that no one will undermine the US shale oil industry on his watch for two reasons.
The first is that it is an industry valued at $8 tn and employing 2% of the US work force and therefore important to the economy and the geopolitics of the United States. However, he may increase regulation of the sector by limiting methane emissions and fracking on federal land. It is suggested that such action could reduce shale oil production by an estimated 300,000-500,000 barrels a day (b/d). However, this is neither here or there for an industry that has already lost 6.37 million barrels a day (mbd) of production in 2020 as a result of the COVID-19 pandemic.
The second reason is that any undermining of the industry or a significant reduction in US oil production will mean a rise in US crude oil imports from the current 9 mbd to 12-13 mbd in coming years and this will deepen US budget deficit.
A Biden administration would likely see natural gas as an important bridge to cleaner fuels and a reduction in coal usage and also an important export.
President-elect Biden says he will make fighting climate change a priority and will re-join the Paris Climate Agreement, which is one of the international accords that Trump dumped.
And while Trump saw tackling global warming as a threat to the economy, a Biden administration is promoting an ambitious $2 tn plan to cut emissions.
I take Libya’s claim that its crude oil production stands now at 1.1 mbd with a huge pinch of salt and if it actually does, then it can’t be sustained for more than a month. The reason is that many major oilfields and oil infrastructure badly need maintenance having been idle for a number of years. My estimate of Libya’s current production is around 500,000 b/d from which an estimated 270,000 b/d can be exported after deducting domestic consumption.
Biden says he's prepared to re-join the Iran nuclear deal if Iran returns to strict compliance - but he wouldn't lift sanctions until then. He also said that Trump’s "maximum pressure" policy has failed while Iran is now closer to a nuclear weapon than it was when Trump came to office.
Even if he eases sanctions, Iran can’t add more than additional 500,000 – 600,000 b/d to the market. The reason is that Iran has managed to raise its crude oil exports to 1.5 mbd by various methods despite the sanctions. This amounts to 71% of its pre-sanction level of 2.125 mbd.
Biden will be less aggressive in dealing with OPEC+ and less demanding that Trump so it will continue to implement its production cuts until oil prices start to surge supported by growing oil demand incentivized by the news that effective ant-COVID vaccines are almost here.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London