Oil markets feared that a Biden victory will lead to a price crash given his clean energy agenda, yet, prices have only been affected by U.S. election uncertainty during the past weeks. Now a Joe Biden presidency is almost a certainty, equity markets and risk assets including oil are rallying.

Adding fuel to the fire, markets have been bolstered by the announcement of a potentially effective vaccine by Pfizer and Moderna and talk about an extension of current OPEC+ output cuts. News about an extension of OPEC+ cuts came as the markets are digesting the news of new lockdowns in Europe and a major rise in Libyan crude production. Despite these bearish facts, oil prices, last week, rose by more than 10% following the vaccine news and bullish rhetoric from the Saudi Energy Minister. 

Libyan crude oil output is currently said to stand at 1.1 million bpd, a sharp rise recorded in less than two weeks since production was resumed. We expect that Libyan production will continue to rise to 1.3 million bpd within the next couple of weeks. Possible OPEC production quota may be imposed on Tripoli if its production reaches 1.7 million bpd.  

The Biden victory will bring new market factors  

The Biden victory will introduce a couple of new variables to the oil markets over the next four years. Biden has already pledged, in a tweet, to return to the Paris Climate Agreement within the first 77 days of his presidency, in a response to President Trump executive order to officially withdraw from the agreement. That decision means that the United States will increase its investment in clean energies and reduce carbon emissions to meet climate targets.

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Furthermore Biden has pledged to freeze licensing for hydro-fracking projects on federal lands, which may cap growth in the U.S. shale patch, and potentially reduce global oil supply. Initial estimates suggest that U.S. shale oil production could be reduced by 300,000-500,000 bpd as a result of this decision. This policy could also lead to higher crude oil prices especially as the world recovers from Covid-19 over the next few years.  Related: Blackrock and Fidelity Are Betting Big On This $130 Trillion Mega-Trend

On the other hand, Biden may return to the Iran nuclear agreement which could lead to easing of U.S. sanctions on Iran, bringing back more than 2 million bpd of Iranian crude oil into already oversupplied markets. Although analysts are divided about Biden’s Iran strategy, any increase in Iranian oil exports will put additional bearish pressure on crude oil prices in 2021. Uncertainty over a new U.S. Iranian deal may be amplified by new undeclared nuclear activities in Iran, including a newly built underground nuclear enrichment facility, which has not yet been inspected by nuclear watchdog IAEA. Next to this, Iranian elections are set to take place in 2021 and the results of these elections are also expected to impact the US-Iranian dialogue.  

Biden victory isn’t expected to impact the OPEC+ agreement   

Biden isn’t expected to have a material impact on the existing OPEC+ agreement, and is expected to have less of a direct impact on crude prices. 

Meanwhile, we expect OPEC+ to make a recommendation to extend the current cuts well into 2021, which will be decided when the group meets on November 30th. A statement from the Saudi energy minister has already pointed out the possibility of a three-month or even a longer extension. Saudi Energy Minister Prince Abdulaziz has not discarded the possibility of deeper cuts, yet as long as prices remain above $40 we expect this to be a less likely scenario.

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By Yousef Alshammari for Oilprice.com

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