Oil needs a supply cut or risk another deep dive

27. Okt. 2020

It is no surprise that Oil has had a rough couple of patches this year, with the Coronavirus shattering oil demand. What will it take for Oil to push back past $45?

There has only been a couple of times where Oil has made strong moves to the upside, notably today and a couple of weeks ago when hurricanes approached the Gulf coast, forcing oil rigs to shut down and restricting supply. Any good demand hopes have been thwarted by what people can see with their eyes. Sure, investors and traders and see oil inventories are declining. However, they can still see the Coronavirus weighing down on demand.

More importantly, the election is more or less a week away, and one of the markets that will get scrutinized the most is Oil. It's the common opinion that if Trump is re-elected, Oil and the initial price movement would most likely be to the upside. However, if Biden is elected, this would be bad for Oil, and the initial price movement would be to the downside. However, is that the case?

Financial Times did an excellent summary of what the future holds for Oil if either candidate gets in.

Biden
· Fixing the Iran Nuclear deal, freeing up more barrels of Oil from Opec members for export (i.e., an increase in supply)
· A $2 Trillion push for renewable energy and infrastructure to reach 'net zero' emissions by 2050
· Ban on Fracking on federal land
· Proposed new drilling limits on Fracking

Trump
· Withdrawal from price Climate Agreement
· Supports regulation for the fossil fuel industry
· Close relationship with Saudi Arabia

The consensus on the street is that Oil will fall on a Biden win. Amrita Sen from Energy Aspects stated that "[the market] is going to focus on Iran, so a Biden win is bearish for oil prices immediately". Furthermore, Amy Jaffe, an energy policy expert and professor at Tufts University, stated that "A Biden Victoria will be a shot in the arm for oil competitors, putting the federal government's weight behind the energy transitions and low-carbon technologies".

However, a Biden win is the least of Oil's problems. As Amy put it, "Tougher milage don't mean much if people cant afford a new car."

In the longer term, how will Oil fair with a Biden presidency? A push to greener energy sources would restrict the use of fossil fuels. The Biden presidency may do this by limiting further exploration of deposits / making it more expensive. This increases the cost of research and development, in which buyers will ultimately have to pay the price through an increase in oil prices.

This would make the opportunity cost of using greener, more expensive energy alternatives like solar. However, there will be a point where greener energy investment alongside increasing fossil fuel prices will make the greener alternative more desirable. Sure, oil prices will be relatively higher – however, demand will slowly plateau.

Bob Mcnally, a former adviser to US President George W Bush and analyst at Rapidan Energy that a Biden win may see a boost in crude in the long term on the idea that Biden "will push for a policy that prohibits / limits exploration for new oil."

A Trump win should see a practical trajectory for Oil. An initial upside on his victory, with support for Fracking alongside the delaying for the impasse of greener energy and Oil, talked about above.

Are you looking at Oil?