The US Election Factor

Risk level: Orange

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)


-Risk-on, risk-off events have ended.

-If you thought Bush v. Gore was rough, hold on tight.

Much of the factors supporting last week’s spike in crude oil prices were temporary, pulling the floor out from beneath black gold. Hurricane Delta sidelined about 90% of the crude oil production in the United States and will likely lead to a draw on US crude oil inventories later this week, lending some support to crude oil prices. Labor disputes in Norway that threatened to sideline as much as 1 million barrels of oil equivalent per day have ended, removing a premium. While a cease-fire in the Caucasus is tenuous at best, that there even was an agreement to begin with is calming. It’s a week of the usual suspects, meanwhile, with monthly market reports from the IEA and OPEC. OPEC will need to figure out what to do with Libya, but the Libyan question was already baked in after tacit handshakes between rival governments last month. With those factors behind us, we wonder how much a chaotic political landscape in the United States will move the market between now and Election Day, just some three weeks away.

Questions over the health of US President Donald Trump, who tested positive for the novel coronavirus, spooked the market last week, providing a jolt to the price of oil. Labor disputes in Norway and a risk premium from fighting between Armenia and Azerbaijan were also supportive, though much of that premium dissolved on Friday. Nevertheless, the price for Brent crude oil jumped some 9%, well within our Red alert from last week, to finish trading Friday at $42.85 per barrel.

President Trump said Sunday he was now “immune” from the novel coronavirus that claimed some 214,000 US lives since the pandemic began earlier this year. Truth monitors at the social networking site Twitter later flagged one of the president’s claims on his health as misleading, and despite receiving the best medical care available, it’s possible the president can still spread the highly-contagious virus. Dr. Anthony Fauci, the nation’s top infectious disease expert, cautioned that a “super-spreader event” in the White House two weeks ago should be cause for concern going forward. From his press secretary to former New Jersey Gov. Chris Christie, to the president himself, there were several infections stemming from an event introducing Supreme Court nominee Amy Coney Barrett. The president, however, held in-person rallies at the White House and is expected to hit the campaign trail as early as Monday. And given the cult-like following among his most-ardent supporters, his health claims will almost certainly support those who question safety protocols and the severity of the pandemic. As of this writing, there are at least 37 million reported infections and 1 million reported deaths caused by COVID-19 globally.

By most measures, the president has an uphill battle to secure a second term in office. Most major surveys show Trump is trailing his rival, former Vice President Joe Biden, in the court of public opinion. An aggregate of 11 surveys compiled by Real Clear Politics show Biden with a 10-point advantage in public opinion, while an estimate of votes in the Electoral College show Biden with 226 in his column to Trump’s 125. Either candidate needs 270 votes in the Electoral College to secure victory. There are now just 21 days to go before the presidential election.

Trump hitting the road goes considerably against the grain. British Prime Minister Boris Johnson, who himself contracted the coronavirus and draws comparisons to Trump in other matters, announced new lockdown measures to control the virus. In the United States, however, the reverse is happening even with the steady rise in new cases. By most metrics, the pandemic has taken a severe toll on the US economy. A lot of ink has been spilled over expectations of a 32% gain in third quarter GDP, but that’s when compared to the major destruction in the second quarter when the nation was just learning to cope with the virus. We’ll find out Tuesday how OPEC economists view the world’s leading economy. By August, economist at the International Monetary Fund said they expected the US economy would contract by around 6.5% for the year. At ING, they’re a bit more optimistic, seeing a contraction of only around 3.5% on the year, though they noted that when looking at the sequential figures, “the vigorous momentum is fading.” In a note of irony given President Trump’s moniker for the coronavirus, only China is expected to post a gain in yearly GDP.

Data on US petroleum products, which are a proxy for consumer demand, have been skewed by the busy Atlantic hurricane season. Hurricane Delta, which made landfall last week as a category 3 storm, knocked some 1.7 million barrels of US oil offline. That’s likely to show up as a drain on commercial crude oil inventories this week, which would provide another temporary boost to the price of oil. No real serious analyst is expecting crude oil prices to come in north of $60 per barrel any time soon, however. Nevertheless, we may see a high degree of volatility between now and Election Day. And given Trump’s own penchant for volatility, we expect the political climate in the country will only become more toxic between now and Nov. 3.

Trump as recently as Oct. 7 raised the prospects that the US election would be fraudulent, claiming “the democrat-run ballot system is corrupt.” And ignoring the long-standing tradition of a peaceful handover of power, Trump has frequently turned to his favorite “we’ll see” when commenting on a possible loss. Two days after that Tweet, and a few short days after he tested positive for the novel coronavirus, commentators at the popular FiveThirtyEight polling site found the tide was shifting in Biden’s favor given the president’s complacency toward the virus. Expecting something of a landslide victory for Biden, FiveThirtyEight worries about an “all-out civil war if things are too close to call on election night.” That, we feel, is a bit overblown, though the recent plot against Michigan Gov. Gretchen Whitmer, a Democrat and thorn in the president’s side, is telling of the toxicity in US political culture under President Trump.

We wrote recently that US democratic standards are already upended. The Justice Department, normally seen as a neutral player, is now considered a Trump ally. It’s already allowed for investigations into the election – before the votes are even counted. If Democrats are unable to block Justice Barret from replacing late Justice Ruth Bader Ginsburg on the nation’s highest court, the potential for political malfeasance is even greater should the election wind up decided again by the Supreme Court.

Trump can drive the market by rhetoric alone and we wonder if he’ll simply burn the place down if it becomes clear he’ll lose the election. His positive test for coronavirus alone contributed to a major spike in the price of crude oil, as evidenced by last week’s surge of some 9% for Brent. Similar to comparing sequential data for GDP, a survey of confidence in the US economy from polling firm Gallup found a slight improvement from the doldrums in April, when the price of US oil went negative. But looking at the broader picture back in September, the mood is souring. Less than half, some 40%, of those surveyed told pollsters the economy is “getting better,” while 56% said it was “getting worse.” Consumer confidence in September improved from the prior month, but remains well below pre-pandemic levels. Globally, the Organization of Economic Cooperation and Development finds confidence in the economy is largely absent. Seeing his prospects dwindle, Trump is betting on another round of stimulus, though any major legislation this close to the election is unlikely. We do not expect confidence to improve.

FiveThirtyEight said a contested election would be “way worse” than when the presidency was decided by the Supreme Court in the 2000 race between Al Gore and George W. Bush. While seasonal factors certainly played a role, the price for Brent crude oil fell some 22% between Election Day 2000 and the end of the year. The day after the Supreme Court ruled on Bush v. Gore, Brent lost 7% to settle at $25.14 per barrel and finished the year 11% lower from there. Barring any black-swan events or yet another October surprise, the focus from here until Nov. 3 will largely be on the US elections. Buckle in.

It will likely be a slow start to the week given federal holidays in the United States and Canada. On Tuesday, the market will move on all-things OPEC, when we get a look at the supply-demand equation and indicators on the global economy. The IMF and World Bank hold a virtual meeting later this week and, with central bank officials running out of ammo, we do not expect a rosy picture. We have the obligatory data dumps from the American Petroleum Institute and the US Energy Information Administration, but those data are skewed by recent storms in the US Gulf of Mexico. The typical jobs data from the United States will likely move the needle too and rig counts are a thing again, so watch the numbers late in the week. The price of oil has been highly erratic since late September, but with much of the risk-on, risk-off events over with, we wonder if things will calm down for a bit on the week. With volatility easing, Brent could settle back into a tunnel around the $41 per barrel range. With Brent already down some 1% in early Monday trading, we’re issuing an Orange alert, expecting oil prices to move by at least plus or minus 3% on the week.


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