Biden win could cause a huge new oil glut

Source

Joe Biden

As if the oil market needed another uncertainty in the year of the pandemic, a Joe Biden win at next week’s U.S. presidential election could have a significant impact not only on the American oil industry but also on global crude supply within a year.  In stark contrast with President Donald Trump’s maximum pressure campaign on Iran with escalating sanctions on the Islamic Republic’s oil industry — including a new round of sanctions slapped this week — Biden pledges to offer Tehran a path back to diplomacy and a return to the nuclear deal. That is if Iran returns to full compliance with that agreement, hammered out while Biden was President Obama’s vice president.

If the U.S. and Iran return on the path of diplomacy under a President Biden, there is a chance that the strict U.S. sanctions on Iran’s oil exports could be eased, potentially paving the way for around 2 million barrels per day (bpd) of Iranian crude oil exports returning to the market.

Analysts argue that although this would not happen overnight, the market will still be too weak and fragile to be able to handle another 2 million bpd of supply, when global oil consumption will not have returned to pre-pandemic levels until at least the end of 2021.

The potential return of some (or all) Iranian exports within a year could also create another major headache for the OPEC+ group of producers who are keeping a record amount of oil off the market in the hope of accelerating market rebalancing and propping up oil prices. Iran, exempted from the current OPEC+ deal, could significantly complicate the efforts of its bitter regional rival Saudi Arabia to lead the OPEC+ efforts to manage supply to the market, and could put downward pressure on oil prices.

Biden has already signaled he would be seeking the path of diplomacy with Iran, if the leaders of the Islamic Republic return to strict compliance with the Joint Comprehensive Plan of Action (JCPOA), as the Iran nuclear deal is officially known.

“Tehran must return to strict compliance with the deal. If it does so, I would rejoin the agreement and use our renewed commitment to diplomacy to work with our allies to strengthen and extend it, while more effectively pushing back against Iran’s other destabilizing activities,” Biden wrote in an essay in Foreign Affairs earlier this year.

More recently, Biden wrote in September an opinion piece on CNN , saying, “There’s a smarter way to be tough on Iran” than President Trump’s hard line on the Islamic Republic.

“I will offer Tehran a credible path back to diplomacy. If Iran returns to strict compliance with the nuclear deal, the United States would rejoin the agreement as a starting point for follow-on negotiations. With our allies, we will work to strengthen and extend the nuclear deal’s provisions, while also addressing other issues of concern,” Biden wrote.

Yet, there are several factors that could delay the return of Iranian oil to the market. The longer the delay, the lower the impact it would have on oil market balance and oil prices, assuming that the world and its oil consumption will have largely returned to normal in 2022.

The Iran nuclear deal is unlikely to be a ‘day-one’ priority for a Biden Administration. If the Democratic candidate wins the election on November 3, his Administration may want to wait until the Iranian presidential election in June 2021 before engaging with the new rulers on the nuclear deal and potential easing of the U.S. oil sanctions.

Moreover, a Biden Administration may have to account for what the ‘diplomacy path’ with Iran would mean for American allies in the region, including OPEC’s top producer and de facto leader, Saudi Arabia. A President Biden would likely be more distant in relations with Riyadh than President Trump’s personal ties with the Saudi rulers and his tweets calling on OPEC to act one way or another.

“Using oil sanctions relief as a bargaining tool in 2021 is a bad idea because of how other regional exporters will react,” Karen Young at the American Enterprise Institute in Washington told Bloomberg , commenting on one potential approach of a Biden Administration toward Iran next year.

A new administration in the White House has a lot of factors to consider in a diplomacy push with Iran. Still, if some kind of agreement with a sanctions relief is reached next year, the oil market and OPEC could face 2 million bpd of additional supply—a possibility that the market has not fully priced in right now.