Biden presidency presents new challenges in balancing markets for Opec+ members
A Joe Biden presidency will probably increase the challenge of drawing back global oil inventories for Opec+, which has to contend with greener policies in the US, and crude from Iran and Venezuela hitting the markets.
The alliance, led by Saudi Arabia and Russia, had co-operated with the Trump administration in increasing production in 2018 and then agreeing to cut back output in the first half of 2020. Earlier this year, Donald Trump, who was previously antagonistic towards the oil bloc, helped to nudge non-Opec producer Mexico to join a historic production cut deal.
At a meeting of G20 energy producers and Opec+, Mr Trump also backed the alliance’s role in correcting the oil markets imbalances in supply and demand, even if US law forbade independent producers from joining the deal.
Opec relations with the US oil industry, which had thawed since 2016, may now come under pressure under a Biden administration.
“President- elect Biden will take a different approach here and not intervene as strongly as [Mr] Trump did,” said Giovanni Staunovo, commodity analyst with UBS.
US oil production is likely to remain restrained at around current levels of 11 million barrels per day over the next 12 months. More sustained output from the shale basins should start to flow when prices trade above $50 per barrel, according to Mr Staunovo.
Opec+, which is currently cutting 7.7 million bpd, tapering the Trump-backed historic curbs of 9.7 million bpd that were in place between May and July, could possibly hold off on further reductions of cuts for the foreseeable future.
“Unless crude prices [ increase] over the coming weeks, economic recovery accelerates considerably and/or the increase in Covid-19 cases stalls – none of which is our base case – the taper process is likely to be delayed by a few months,” Mr Staunovo said.
Opec+ already has to contend with rising supplies from Libya, which is currently producing more than 1 million bpd, after a force majeure in place since January came to an end. Oil demand is probably set to weaken during the winter months, which is likely to be factored into the Opec+ assessment of oil market dynamics.
“We do not expect deeper cuts unless global lockdowns return,” said Mr Staunovo.
Globally, Covid- 19 cases crossed the 50 million mark on Monday with more than 1.27 million deaths registered as of yesterday.
Mr Biden will assume leadership of a country with the worst count of Covid-19 and is likely to have his hands full controlling the outbreak in the US and paying attention to the economy, rather than devoting significant time towards the oil industry. The US accounts for a fifth of all Covid cases and registered 244,470 deaths, according to Worldometers, which tracks the pandemic.
Oil prices surged above $40 per barrel on Monday following news of a vaccine breakthrough by US pharmaceuticals company Pfizer. Brent jumped 7.5 per cent on Monday and rose by a further 1.1 per cent yesterday to $42.85 by 5.49pm UAE time. West Texas Intermediate rallied 8.5 per cent on Monday and edged up 1 per cent yesterday to $40.67 per barrel
“Optimism that a vaccine will be used could transform behaviours if it is used widely, allowing a recovery across the barrel, particularly in jet fuel,” said Shady Elborno, head of macro strategy at Emirates NBD.
A Biden presidency could prove to be a “short-term catalyst for higher oil prices” in spite of a Republican- controlled Senate owing to the “accelerated push” towards clean energy, which is likely to lead to a higher marginal cost of shale, according to Japan’s largest bank, MUFG. “Investors [will be] less willing to fund exploration and development,” it added.
Mr Biden, who took a highly contested Democratic nomination from an increasingly left-leaning party, is likely to continue to appease the greener elements within the caucus.
The president- elect has pledged $ 2 trillion over the next four years to progressing the energy transition in the US, notably in growing the role of clean resources in the transport, utilities and building sectors. “Anybody who’s a price taker of oil is going to be struggling under this type of situation where the US is going to probably green quicker than what the markets had anticipated under a Trump presidency,” said Stephen Innes, chief global strategist at Axi.
“However, let’s face it, the world is going green. China’s going green, Europe is green,” he added.
Mr Biden is expected to reverse some of the more controversial executive orders issued during the Trump presidency, notably the US exit from the Paris Agreement.
He is also likely to reverse the outgoing administration’s “maximum pressure” strategy towards Iran, which will probably face more sanctions before Mr Trump leaves office on January 20, 2021.
However, Mr Innes says the orders are unlikely “to stick” as a transition is already under way.
President- elect Biden will take a different approach here and not intervene as strongly as his predecessor Trump did
GIOVANNI STAUNOVO UBS commodity analyst