What Obama's second term means for global oil markets
As the US gets back to business after a hard-fought presidential election campaign, the market may well turn bearish
Last night’s victory for Barack Obama has already softened oil markets a bit. Front-month Brent was down by more than $3 a barrel in London in afternoon trading on 7 November. But Obama’s re-election offers competing forces that will give direction to the crude market. There are three main reasons to expect second-term Obama to be bearish for oil – and one reason for why his win will provide some succour to prices.
Start with the reason why Obama will support oil prices. The US economy is recovering. The slow recovery may have continued under Mitt Romney, too. But stability in US economic policy is helpful. For oil, that’s particularly true where monetary policy is concerned. Romney would not have renewed Federal Reserve chairman Ben Bernanke’s tenure. Under Obama, though, Bernanke remains – and so do his quantitative easing and low-interest-rate policies. They act to weaken the dollar and, indirectly, to push cash in the direction of commodity markets. Dollar weakness tends to support the oil price. And if the monetary easing policy keeps the slow recovery on track, expect US oil demand to pick up on the margins over time, too. That’s good for oil prices.
The bearish forces, though, are much more powerful.
The first is the fiscal cliff. The consensus is that a Romney presidency would have had an easier time thrashing out an agreement with Congress (where Democrats still control the Senate and Republicans hold a majority in the House of Representatives) to avoid the impending expiry of Bush-era tax breaks and the introduction of Congress-inspired spending cuts. If previous partisan squabbling on the Hill is anything to go by, though, Obama will struggle.
The worst-case outcome is that Congress and the White House don’t reach an agreement, the cuts are imposed and the tax relief ends – taking more than $500 billion out of the US economy next year. At worst, that would reverse recent improvements in the job market, hurt consumer spending and send the country back into recession. Big US firms are already curtailing discretionary spending, putting a damper on employment growth. Fitch, a ratings agency, says another downgrade for the US could be on the cards. With China and the Eurozone economies also struggling, any new backsliding from the US would spell more global macroeconomic woe. US oil consumption, already weakening year on year, would take another hit. Oil-demand growth elsewhere would be threatened. A messy, prolonged debate about the fiscal cliff – more likely now that Obama has regained the White House – could be just as damaging. It is a major worry for the oil market.
Next up is Iran. News that the US and Tehran may be open to bilateral negotiations to end the nuclear stand-off surfaced during the campaign. In the debate on foreign policy, Obama obliquely confirmed his administration’s openness to such talks when he welcomed Romney’s support for “our policy of applying diplomatic pressure and potentially having bilateral discussions with the Iranians to end their nuclear programme”. The bigger election-season issues obscured it, but the prospect of a negotiated settlement to the Iranian nuclear issue is a major potential oil-price softener. An end to sanctions on Iran’s oil sector would, of course, unleash much pent-up supply from Iran, whose exports have fallen by about 1 million barrels a day. Iranian willingness to talk can’t be taken for granted, of course. But now that he knows which president he will be dealing with, Ayatollah Khamenei has an opportunity to find a way out of the sanctions disaster unfolding in his country.
Obama’s troubled relationship with Israel’s prime minister Benjamin Netanyahu, who seemed openly to back Romney’s bid for the White House, is another factor. Obama will be much less supportive now of Israeli sabre-rattling over Iran, which may rein in Netanyahu’s rhetoric. Some Iran analysts say a deal with the US is unlikely until Mahmoud Ahmadinejad’s presidency ends next year. But Obama now has a second-term president’s freedom to pursue a grand bargain with a foe that has stalked US foreign policy for 30 years. A peaceful solution is more likely under Obama than under Romney. Any signs of a deal will drive oil prices sharply lower. Signing one could send the market into a tailspin.
Lastly, Obama’s longer-term US domestic energy policies are, on balance, probably a bit more bearish for oil. Romney and Obama both pledged some vague nonsense about US energy independence. But Romney’s path to this magical mystery land was almost entirely through a forest of demand-side solutions: open more federal land to producers, unleash the drillers on Alaskan wilderness, let in more Canadian oil by approving the Keystone XL pipeline from the oil sands, and so on.
Obama may do some of those, too. But his energy strategy also calls for more renewable energy, which will affect demand for fossil fuels on the margins; and, crucially, includes proposals to slash demand. The most important of those are rules to lift fuel-economy standards to 54.5 miles per gallon by 2025. The White House claims that will cut oil consumption by 2m b/d in the next 13 years. Romney called the rules “extreme”. But the new mileage targets will only accelerate the secular demand erosion under way in the US, especially in its transportation sector. Alongside rapidly rising tight oil supplies – a trajectory that seems certain to continue under Obama – demand-side policies should free up a lot more oil in the world’s biggest market. That should have a long-term softening impact on global crude prices.