Democrat Joe Biden took his place as president of the United States on Wednesday and promptly took actions that may have a long-term impact on oil prices and also show a vastly different approach to the energy market than his predecessor.
On day one as president, Biden revoked approval for the Keystone XL oil pipeline and rejoined the Paris climate agreement, the 2016 pact which set a global framework to battle climate change.
Those decisions offer an “indication of the new president’s attitude towards fossil fuels, a sobering action for market observers who look at the long term,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy. He expects actions by the Biden administration to reduce long-term oil demand as the move away from fossil fuels accelerates.
Still, that potential loss of demand may not be obvious early on in the presidential term, he said in emailed commentary. “The stimulus package and the infrastructure plan the new administration is putting forward will cause an uptick in oil consumption.”
If all promises by the president are kept in his first year, oil demand in 2021 is expected to get a 350,000 barrel-per-day boost, said Tonhaugen, compared with demand projections that exclude political decisions.
In a monthly report released this week, the International Energy Agency said it expects oil demand to recover by 5.5 million barrels per day to 96.6 million barrels per day in 2021, following a decline of 8.8 million barrels per day last year.
As for the Keystone pipeline cancellation, Thomas Liles, vice president for North American shale at Rystad Energy, pointed out that the pipeline expansion would have provided Canadian oil sands producers with more than 800,000 barrels per day of “incremental export capacity” to U.S. markets. However, “Canadian producers have already factored egress constraints into their near-term growth profiles, not to mention uncertainty over demand.”
Given that, “the impact on Western Canadian oil production in the near- to mid-term is likely to be muted,” said Liles.
Biden, meanwhile, indicated during his campaign that he may return the U.S. to the Iran nuclear deal, which could ease sanctions on Tehran and bring more oil back to global markets.
The new president is “more likely to be softer on Iran and a lifting of sanctions is possible,” said James Williams, energy economist at WTRG Economics. “That puts more oil on the market and downward pressure on price.”
For Paul Sheldon, geopolitical advisor at S&P Global Platts, the presidential inauguration marked “a seismic political shift on many levels, and for oil markets the change in government will trigger several of 2021’s top bearish and bullish risks.”
Over the past four years, U.S. oil sanctions on Iran and Venezuela alone removed around three million barrels per day from the current market, “while military tensions with Iran, unprecedented pressure on OPEC+, and a strategically unpredictable Middle East policy all contributed to periods of market volatility,” he said in emailed commentary Wednesday.
Biden will “lead U.S. foreign policy on a diametrically different trajectory, a dynamic which skews geopolitical oil market risks to the bearish side for the first time since 2015,” said Sheldon.
He believes there is “significant upside supply risks if the Biden administration’s diplomatic efforts with Iran and Venezuela bear fruit.”
Sheldon estimates that Iranian sanctions relief may bring back as much as one million barrels per day of oil to the market by the end of this year, and another one million barrels per day by mid-2022, “although the diplomatic timeline is likely to be slower.”
In Thursday dealings, oil prices edged lower following data from the American Petroleum Institute, which revealed a surprise weekly increase in U.S. crude-oil supplies.
March West Texas Intermediate oil
lost 20 cents, or 0.4%, to $53.11 a barrel on the New York Mercantile Exchange. March Brent oil
lost 3 cents, or nearly 0.1%, to $56.05 a barrel on ICE Futures Europe.