The U.S. presidential election, renewed lockdowns in Europe and other impending news means next week could be critical for determining the direction of the global economy and oil demand.
Two major issues have driven oil down this week. Below we'll cover these two factors as well as what to expect ahead:
2 Factors Weighing On WTI Prices
1. Election Volatility
The first major issue weighing on oil prices: the possibility that neither Presidential candidate will garner a decisive win in the election set for Tuesday, Nov. 3. Investors are taking money out of the equities and commodities markets in preparation for what could be a disputed election.
The last contentious presidential election was in 2000, when it took weeks of recounts and court cases to determine the eventual winner. Given the current deeply felt political sentiments in the U.S., it is possible that this election may be disputed for days after voting ends. As this column discussed last week, markets don’t like this kind of uncertainty
2. European Lockdowns
The just announced coronavirus restrictions in two of Europe’s largest economies, France and Germany, have also dented oil prices this week. Due to rising COVID-19 cases, President Macron and Chancellor Merkel introduced new lockdown measures, which will drive down oil demand in their respective countries. Other European countries may follow suit.
The damage to oil demand from these measures won’t be fully known until we see how people react. But data from Bloomberg which detailed highway usage in France, Spain and Italy and overall road usage in the United Kingdom showed decreased usage between Oct. 11 and Oct. 25. The government imposed shutdowns, even though they don’t include primary and secondary schools, will hurt gasoline consumption numbers even more.
What To Expect Next
1. Effects Of Hurricanes Delta And Zeta
The impact of Hurricane Delta, earlier in October is still showing up in the EIA’s weekly petroleum status report. Numbers released yesterday (Wednesday, Oct. 28) showed a 4.3 million barrel build in crude oil stores, which is being attributed to a backlog in refining due to refinery closures from Hurricane Delta.
Meanwhile, Hurricane Zeta is coming through the Gulf of Mexico and, as of the writing of this column, made a landfall near New Orleans, Louisiana and swept into Tennessee. Unlike the two previous storms that hit Louisiana this year, Zeta is not forecast to come close to the oil refining and petrochemical infrastructure that is located on the Louisiana-Texas border.
However, according to the Bureau of Environmental Enforcement (BSEE), about 67% of current oil production in the Gulf of Mexico has been taken offline due to this storm. That amounts to about 1.2 million bpd of oil production. Traders should anticipate to see these shut-ins impact next week’s EIA weekly petroleum status report.
2. New Iran Sanctions
The U.S. Treasury Department announced new sanctions on Iran’s Ministry of Petroleum, on the National Iranian Oil Company, its oil tanker company and also on Iranian oil minister Bijan Zangeneh on Monday.
These new sanctions are unlikely to change Iran’s oil production or export patterns. According to TankerTrackers.com, Iran continues to export oil (somewhat) furtively, in contravention of U.S. sanctions. In September, it exported nearly 1.3 million bpd of oil and is on track to export a similar amount in October.
If Biden wins the election, he could change U.S. sanctions policy, but not before he is inaugurated on Jan. 20. We do not know how much more oil Iran would supply to the market if Biden wins and if he changes the policy. Analysts project it could be anywhere from 1.8 million bpd to 2.5 million bpd in 2021, if sanctions are removed.
However, Traders shouldn’t put much stock in these numbers, because no one knows. If Biden wins and does not move toward relaxing sanctions, it is still possible that Iran could take advantage of a seemingly compliant administration, and expand its (somewhat) clandestine exports under the expectation that a Biden administration would not enforce any repercussions.
It is also possible that a Biden administration could continue to enforce sanctions until a new deal is reached or the JCPOA deal from the Obama administration is reinstated. The Biden team has not provided much information for traders to consider concerning its Iran plans.
3. OPEC+ Plans
Signs are growing that OPEC+ will decide against boosting production as planned in January. On Wednesday, the head of Saudi Aramco’s trading arm said that because refineries outside of Asia have cut the amount of crude oil they are processing, he thinks it would be very difficult for the market to absorb crude from increased production.
Many non-Asian refineries have cut their capacity, and some are shutting down due to poor margins. However, OPEC+ may find itself with another 1 million bpd on the market even if it decides against its planned 2 million bpd increase in January. Libyan oil exports are set to reach 1 million bpd in the next month after a recent truce in that country’s internal conflict.