The bullish vs. bearish case for oil under a President Biden

Oil prices have just struck a 5-month low because European lockdowns hamper energy demand. Will the breakdown continue or abate if Biden gets elected?

 

The oil price has been locked in a sideways range for five months and has only just started to tip its hat that it is ready to break lower rather than higher. A downside break is closer at hand but a return to the range and subsequent break higher is still possible.

 

CHART: WTI Crude oil (6-months)

 

What’s happening with oil?

Crude oil prices have plummeted to their lowest levels since May. The weakness oil intensified last week after bigger builds than expected in US inventories reported by the API and EIA. The reaction amounts to concern that US and global demand for oil is tapering off again, making a sustained price recovery harder post-election.

 

Oil traders are worried the second set of national lockdowns in Europe will heavily weigh on the economic recovery of the world’s second largest trading bloc and hit fuel demand even further. The worry is understandable given that following the first lockdown, WTI crude prices went to negative $37.63 a barrel!

 

The sentiment in the market around oil – and the producers of oil is at rock bottom. There are major short term and long term headwinds facing the energy industry. In the short term, global demand has been decimated by the coronavirus pandemic and ongoing economic lockdowns and travel restrictions. In the long run, a major transition is being attempted away from fossil fuels and toward renewable energy like solar and wind, which have become much more affordable and efficient in recent years.

 

The following chart showing the price of zoom –a company that runs video conferencing software overtaking one of the world’s largest oil producers in market capitalisation is stark example.

exxon vs zoom market cap

On the physical front, even back in September when the global economy was still in recovery mode from the lockdowns in spring, there were signs that demand for oil was already rolling over. This trend has intensified into October and the price is reflecting that.

total us oil demand growth 2020

 

Now what? What are the main arguments for and against investing into the oil price?

 

The Goldman bullish case

Goldman Sachs forecasts $65 Brent oil prices in 2021 thanks to a recovery in global oil demand. A part of this bullish thesis is Joe Biden winning the presidential election that Goldman states is a positive force for oil.

goldman oil forecast

 

A Biden election would in theory increase costs for Shale oil producers in the US by increasing red tape, capping methane emissions and possibly raising taxes on the sector in an effort to encourage green investment into renewable energy. Biden specifically said he would ban new oil and gas leases on federal land. Goldman also predicts a Biden presidency would mean a weaker US dollar because it would mean large deficit-spending. By extension, that probably means even more money printing from the Fed to make that deficit spending possible/affordable for the US government.

 

Under a Trump second term, Goldman are still bullish on oil going into 2021 – suggesting the impact the administration can have would be ‘modest’. This makes sense from the standpoint that the shale oil industry was already opened up, boomed and busted under Trump. New lighter-touch regulations would struggle to recreate the magic of 2017-19.

 

The Iran bearish case

Joe Biden has said that he favours a diplomatic solution instead of the sanctions imposed by Donald Trump on Iran to reel in their nuclear and regional ambitions. He wrote in an option piece for CNN that “There’s a smarter way to be tough on Iran” without stating what that might be. This is self-evident because Joe Biden was VP to Obama when the Iran nuclear deal was signed and at the time it was heralded as one of the Obama presidency’s most important foreign affairs achievements.

 

When Biden eases the sanctions on Iran, it opens up 2 million more barrels per day in oil output onto global markets. If left unchecked, it would tip the scales of demand and supply into over-supply.

 

 

The timing as to when diplomats would from the US and other joint signatories would ease the sanctions and when Iran would agree full compliance is uncertain. Biden would have bigger fish to fry in the early days of his presidency than the Ian deal so it might be a few months delayed. Biden will also need to make good with other oil rich nations in the region. But it’s a question of when not if.

 

There is a risk to any supply-based scenario, and that’s what the OPEC+ cartel will agree on how much to limit overall output. OPEC could theoretically cut 2 million barrels per day from quotas and supply-demand would be re-balanced. But with a record cut to output already having been agreed and an economy-crushing pandemic, Arab nations that need every cent in oil revenue will be reluctant to cap output further for the sakes of Iran.

 

 

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