US ELECTIONS: Trump, Biden race holds big oil policy impacts for shale, sanctions

Note: This is the first in a series about the impact of the US elections on key energy commodities. Similar deep dives into LNG, natural gas and the energy transition will follow over the next several weeks.

The US presidential election in November presents a stark contrast for the next four years of US oil policy that could shape supply/demand dynamics domestically and abroad, with implications for shale, sanctions, trade and OPEC relations.

The greatest domestic impact could come from a promise by Democratic nominee Joe Biden to stop issuing drilling permits for federal lands and waters, which would shrink US oil production by up to 2 million b/d by 2025, primarily from New Mexico's Delaware Basin and the Gulf of Mexico, according to S&P Global Platts Analytics.

Additional Coverage: 2020 US Elections

The top risks to the international oil market center on the next administration's approach to Iran and Venezuela, which have seen their oil exports fall by a combined 3 million b/d as a result of President Donald Trump's tight enforcement of sanctions against both OPEC producers.

Other potential oil impacts run the gamut of environmental, foreign relations and trade policies, but the market will ultimately dictate how any actions by the White House influence oil supply, demand and prices.

While some US oil executives have warned of bleak times for the industry if Biden wins, Platts Analytics does not expect anti-fossil fuel measures to top the new administration's early agenda.

"I don't believe for a moment that his first year will be marked by him taking on the oil and gas sector at a time when they're all struggling," said Chris Midgley, Platts global head of analytics. "That would be suicide. He needs to make sure he's sustaining the momentum of the economy.

"This is a little bit why we do see Biden being a bearish signal to the oil markets because we see a greater likelihood of the return of Iraqi oil, maybe some Venezuelan oil -- it can't get any lower," Midgley added. "And of course US shale, although it will continue to struggle based on the current economics, I don't think it will be his first priority to focus on."

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Shale's future

US oil production is returning from peak shut-ins of 2.8 million b/d during this spring's oil price crash, but drillers' severe capital expenditure cuts will constrict output through next year.

Platts Analytics expects US oil production to decline about 880,000 b/d year on year in 2020 and more than 1 million b/d in 2021. That would put US output about 3.1 million b/d below Platts' pre-price collapse forecast by end-2021.

US oil production increased 3.9 million b/d between Trump's inauguration in 2017 and the onset of the pandemic in March. But the 2015 end to export restrictions during the Obama administration arguably played a bigger role than current White House policies. Trump has promised to continue a deregulatory push in a second term, after loosening methane rules and opening new offshore and arctic areas to drilling in the first.

Fracking ban

While many of Biden's Democratic primary opponents pushed for a total fracking ban, including on private lands, Biden has promised only to halt new federal permits.

"I am not banning fracking," Biden said Aug. 31 during a campaign stop in Pittsburgh. "Let me say that again. I am not banning fracking -- no matter how many times Donald Trump lies about me."

Biden added that his $2 trillion clean energy investment plan held a place for oil and gas workers in western Pennsylvania.

Even if Biden freezes federal permitting, some analysts see a muted supply impact as drillers shift focus to private acreage.

Operators holding federal permits have kept actively drilling to build up an inventory of drilled-but-uncompleted wells that they can still produce if federal policies change. The share of US oil wells drilled on federal lands surged to 22% of total wells drilled in June, from 12% in February.

"A potential fracking ban on federal acreage would hardly have any impact on nationwide oil and gas output in the medium term, given the already existing depth of low-cost inventory and activity migration," Rystad Energy said in an August report.

Energy infrastructure

Easing permitting for pipelines and other energy infrastructure has been central to Trump's deregulatory agenda, although with limited success on the highest profile projects. The 830,000 b/d Keystone XL heavy crude pipeline and 570,000 b/d Dakota Access Pipeline continue to face court challenges.

Biden might ultimately deny Dakota Access a new permit, which could threaten the return of up to 300,000 b/d of shut-in Bakken supply in the near term and cap takeaway capacity at 1.15 million b/d, as operators reshuffle logistics and mobilize additional rail capacity, according to North Dakota regulators.

Biden would also likely appoint commissioners to the Federal Energy Regulatory Commission who would take indirect climate impacts into account during project approvals, making projects tougher to permit.

Sanctions relief

The next US president's approach to Iran could have the biggest global supply impact, if up to 2 million b/d of Iranian oil returns, either through Biden rejoining the nuclear deal or unpredictable direct talks by Trump.

"Saudi Arabia and Russia would be unlikely to make disproportionate cuts to make way for 1 million-2 million b/d from Iran, which could accelerate the next shift back to a market-share strategy," Platts Analytics said.

Rapidan Energy Group predicts 1.8 million b/d of Iranian exports could return by end-2021 under a Biden White House, a year earlier than under Trump negotiating scenarios.

On Venezuelan sanctions, Biden is seen as more likely to grant relief on humanitarian grounds, while Trump might be more willing to meet directly with President Nicolas Maduro.

Any easing of restrictions on state-owned PDVSA would carry a smaller supply impact than Iran sanctions relief. Exports could potentially increase 500,000 b/d to return to 2019 levels, but the country's oil sector would remain hobbled without a change in government, debt relief and foreign investment.

OPEC, trade approach

Trump would likely continue practicing Twitter oil diplomacy, which he started in his first term to urge OPEC+ producers to increase or cut supply during their meetings in Vienna. He takes credit for helping to negotiate an end to the March oil price war between Saudi Arabia and Russia.

Under Biden, any US diplomacy toward OPEC might return behind the scenes. Antitrust legislation against OPEC would only see renewed interest if gasoline prices soar, which is not expected through 2021.

During Trump's first term, tensions with Beijing have flared to the point that some analysts expect a decoupling of US-China ties, which could have massive trade impacts. China was seen as a top outlet for growing US crude exports, but trade tensions have limited those flows, and China is not on track to meet its Phase 1 commitments for US energy purchases.

While Biden is expected to tone down the rhetoric against China, analysts do not expect any major warming of ties that could lead to revived trade.

US crude exports to China jumped to 1.5 million b/d in May, a record high, after languishing for nearly two years. China imported 906,000 b/d in June, according to the Energy Information Administration.