- The recovery of oil prices stalled in recent days on news of new lockdowns in Europe.
- A victory for Democratic candidate Joe Biden in the presidential election could boost oil demand in the short term, lifting prices, according to a new report by Rystad Energy.
- But in the longer term, his administration would likely cause both a drop in demand and an increase in supply, which could lead to lower oil prices.
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An administration run by Joe Biden would have a mixed impact on oil markets, though it would likely result in lower oil prices over time, according to a new report by the research firm Rystad Energy.
In the short term, Biden could give markets a boost, the group said in the Tuesday report. Assuming the Senate is also under Democratic control, Biden's likely to pass a massive stimulus package, ramping up energy consumption and lifting oil prices as a result.
Down the road, however, his administration — which is committed to supporting clean energy — is likely to both constrict oil demand and increase supply, Rystad said. Ultimately, that's bad news for oil prices.
"Although a Biden win could benefit short-term demand, his approach to foreign relations could bring more supply to the market, thus a conservative oil-friendly Trump win could be the most bullish immediate outcome for oil," the group said.
Oil prices crashed this spring, as lockdowns tied to the spread of coronavirus caused fuel demand to plummet. While they've since gained some ground, crude prices are still down more than 40%. They've failed to gain ground recently as coronavirus cases mount around the world.
"Above all, we expect the election to be a milestone, a sigh of relief, after which the oil market will reorient itself to the larger structural macro weakening and the increasing likelihood of a second, yet milder, wave of Covid-19 oil demand destruction," Bjornar Tonhaugen, an analyst at Rystad Energy, said in the Tuesday note.
Here are three ways a Biden victory could boost oil markets — and three threats his administration poses.
A Biden administration could boost oil demand in the short-term
Stimulus money translates to economic activity, which in turn translates to increased oil consumption.
In fact, Rystad estimates that an additional $1 trillion in stimulus would amount to another 400,000 barrels per day of oil demand in 2021 (for reference, last year the US consumed about 20 million barrels of oil per day).
Biden's administration may also smooth over US-China relations, Rystad said, which could increase maritime exports and, thus, maritime oil demand. Rystad estimates the "trade war" between the two countries has resulted in a loss of 300,000 barrels per day of maritime oil demand through 2019.
"Thus, a similar amount of oil demand could be expected to return if trade relations between the US and China are normalized, which we believe could happen as early as 2021," the group said.
Similarly, Biden's foreign policy may focus on globalization, and that could benefit oil demand in emerging markets, the research firm said.
Overall, a Biden administration might lead to lower oil prices
There are a few longer-term actions expected under a Biden administration that would likely force down the price of oil, Rystad said.
The first is a tightening of fuel-economy standards.
At a minimum, Biden is likely to undo the Trump administration's rollback of fuel economy standards and return to Obama-era regulations. That alone would cut half a million barrels-per-day of oil demand by 2025, Rystad said.
Biden may go further, mandating that all new cars sold in the US be emissions-free.
If Democrats also win control of the Senate, Biden is likely to make massive investments in support of electric-vehicle adoption and charging infrastructure. Considering transportation is the largest draw of oil in the US, that would put additional pressure on oil markets, Rystad said.
A Biden presidency may also ease sanctions that have limited oil production in Iran and Venezuela, the group said.
"The day Iran can turn the taps back on, there will be a literal deluge of crude on the market," the note said.
Oil demand will wane regardless of who takes office
There are two much bigger forces at play — the coronavirus pandemic and the transition to cleaner forms of energy.
Rystad says that any efforts to curb the pandemic, such as a national mask mandate, are good for oil demand. When economies are open, they consume more fuel.
But regardless, oil demand will fall in the decades to come as countries transition away from fossil fuels and towards cleaner sources of energy, the group said.
"The energy transition will likely plow ahead in the medium and long-term under either a Republican or Democratic administration," the note said. "Technological advances and price incentives will propel this in the long-term, so any political opposition would likely be a blip in the bigger picture."
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