Why a Biden presidency may present new challenges for Opec+

The new US administration needs to battle Covid-19 and mend its economy but environmental policy changes are in the pipeline

People watch a television news programme reporting on the US presidential election showing an image of US President-elect Joe Biden, at a railway station in Seoul on November 9, 2020. / AFP / Jung Yeon-je

A Joe Biden presidency is likely to 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 cooperated 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, president Donald Trump, who was previously antagonistic towards the oil bloc, helped nudge non-Opec producer Mexico to join an historic production cut deal.

At a meeting of G20 energy producers and Opec+, Mr Trump also backed the alliance’s role in correcting the imbalances in supply and demand in the oil markets, 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 President Trump did,” said Giovanni Staunovo, commodity analyst with UBS.

US oil production is likely to remain restrained around current levels of 11 million barrels per day over the next 12 months, with more sustained output from the shale basins to flow when prices trade above $50 per barrel, according to Mr Staunovo.

Opec+, which is currently cutting 7.7m bpd, tapering the Trump-backed historic curbs of 9.7m bpd that were in place between May and July, could possibly hold off further reductions of cuts for the foreseeable future.

"Unless crude prices spike 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 above 1m bpd, after a force majeure in place since January came to an end. Oil demand is also likely to weaken during the winter months, which is likely to be factored into Opec+ assessment of current oil market dynamics.

“We do not expect deeper cuts unless global lockdowns return,” said Mr Staunovo.

Globally, Covid-19 cases are above 50 million as of Monday with over 1.2 million deaths registered so far.

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 243,768 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-based pharmaceuticals company Pfizer. Brent jumped 8.64 per cent to trade at $42.86 per barrel at 5.58pm UAE time on Monday and receded on Tuesday to $41.86 at 8.02am, while WTI rallied 9.72 per cent to $40.75 per barrel and fell to $39.64.

"Optimism that a vaccine will be deployed could transform behaviours if it is deployed 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 due 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 help with progressing energy transition in the US, notably in growing the role of clean resources in the transportation, utility 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, you know, let's face it, the world is going green. You know, 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 is likely to face more sanctions before President Trump leaves office on January 20, 2021.

However, Mr Innes says the orders are unlikely “to stick” as a transition is already underway.

UBS, meanwhile, is not factoring in a return of Iranian barrels for the first half of 2021, considering the length of time it took to negotiate the Iran nuclear deal under the Barack Obama administration, in which Mr Biden served as vice president.

"Some market participants see Iran exporting more crude than others, which might mean that Iran's production estimates might be underestimated, resulting in a smaller effective production increase," Mr Staunovo said.

"In case of Venezuela, the production response should be smaller, considering the under-investment in the energy sector over the past years.”

EDITOR'S PICKS
NEWSLETTERS