What a Biden victory could mean for commodities - Capital Economics
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What a Biden victory could mean for commodities

Commodities Focus
Written by James O'Rourke
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A victory for the Democratic party in November’s presidential election has several potential implications for commodity markets. Very broadly, Joe Biden’s pledge to actively promote decarbonisation of the economy should accelerate the move away from coal, boost natural gas demand in the near term and be positive for agriculturals used to make biofuels. In the longer term, it has negative implications for the supply, demand and prices of all fossil fuels and biofuels. Elsewhere, if Biden’s infrastructure spending plans are realised, there would probably be a marked increase in US consumption of industrial metals.

  • A victory for the Democratic party in November’s presidential election has several potential implications for commodity markets. Very broadly, Joe Biden’s pledge to actively promote decarbonisation of the economy should accelerate the move away from coal, boost natural gas demand in the near term and be positive for agriculturals used to make biofuels. In the longer term, it has negative implications for the supply, demand and prices of all fossil fuels and biofuels. Elsewhere, if Biden’s infrastructure spending plans are realised, there would probably be a marked increase in US consumption of industrial metals.
  • To be clear, we are not assuming a Biden victory. If President Trump wins the election, we would expect him to continue with the lighter-touch environmental regulation and fuel standards, as well as sanctions on Iran, that characterised his first term in office.
  • In the near term, we do not think a Biden victory will have any immediate impact on US oil demand or supply. However, it would introduce a downside risk for prices if a Biden presidency seeks to improve relations with Iran. After all, any lifting of US sanctions would allow Iran to raise output and potentially flip the oil market back into a surplus. But in the medium term, we expect that the outcome of the election will have little impact on the trajectory for oil prices. Indeed, regardless of the November result, we forecast that oil demand will fall in the medium term, with global oil prices set to decline steadily in real terms from 2024.
  • Meanwhile, natural gas prices could benefit from a Biden presidency. As part of his commitment to carbon-free power generation by 2035, we would expect natural gas demand to start to gain from an accelerated shift away from coal.
  • Industrial metals stand to benefit from Biden’s promise to spend $2trn ‘as quickly as possible’ within his first term to expand the US’s clean energy infrastructure. But even if this is delivered, we only expect a short-term boost to prices of industrial metals in the US. The bigger picture remains that the trajectory of demand in China will be the main determinant of global metals prices.
  • Nor do we think that a Biden victory will have much of a bearing on precious metals prices. Instead, the path of US real yields is more likely to be the main driver of prices.
  • For agricultural commodities, we suspect that a Biden victory offers some upside for corn demand and prices given his support for biofuels, while it may also reduce some of the downside price risks associated with Trump’s aggressive trade policies.
  • That all said, there are clear risks to our forecasts. If the Democrats fail to secure a ‘clean sweep’ of both houses, then any Biden legislative agenda would be severely hampered, limiting the scope and scale of any policy initiatives. And even if the Democrats take control of Congress, there is still considerable uncertainty over the imposition of both short and long-term spending priorities.

What a Biden victory could mean for commodities

In this Commodities Focus, we explore the potential ramifications of a Biden victory in the US presidential election for commodity supply, demand and prices in both the short and medium term. We suspect that natural gas, corn and US steel prices stand to benefit in the short term, while coal and oil are likely to suffer. Further ahead, we think fossil fuel prices will all decline, regardless of the election outcome.

Our US Economics Service is the place to look for detailed economic insight on the outcome of the election. But with fiscal and monetary policy set to remain loose regardless of who wins, we doubt the election will have much of a bearing on the medium-term outlook for economic growth. Rather, the election will be important in determining the size of any fiscal stimulus, which would have an impact on economic growth in the near term. (See our US Economics Focus.)

A recap on Trump and commodities

President Trump took office in 2017 and his term coincided with a rise in the domestic production of most energy commodities, including oil and associated natural gas. And while some of the rise in oil and gas output was down to production-friendly policies, including weaker environmental regulations, we think higher prices also played a part.

He also attempted to shore up metals production in the US by implementing unilateral tariffs on steel and aluminium exports in 2018, while also levying further wide-ranging punitive tariffs on China, citing unfair trade practices. In addition, Trump also increased subsidies paid to US farmers, in order to compensate them from trade-related losses.

It seems likely that Joe Biden, if elected, will seek to reverse some of Trump’s policies. For starters, he has promised to invest in green energy infrastructure and decarbonising power generation. What’s more, in order to achieve net-zero carbon emissions by 2050, Biden has also pledged to accelerate the roll-out of electric vehicles (EVs).

Oil prices to face headwinds in the short term

We suspect that the risks to oil prices are to the downside in the short term, even if we don’t foresee an immediate impact on US demand or supply. Many analysts expect Biden to negotiate a new nuclear accord with Iran, which could ease sanctions. Such a move would leave Iran free to raise oil output and exports, which could flip the global market back into a surplus, weighing on prices. Iran’s oil output has fallen by nearly 2m bpd since the US withdrew from the JCPOA and imposed sanctions. (See Chart 1.)

Chart 1: Iran Oil Output (Mn. BpD)

Sources: OPEC, Capital Economics

At the same time, Biden has announced policies that could curb US oil supply growth. These include bans on new leases and drilling on federal lands and waters (around 25% of output), as well as limits on flaring and methane emissions. In addition, further barriers to building oil pipelines are also likely. But we don’t think that these measures will stop current production. Rather, they will act as a headwind to future output by raising the lifecycle costs for new oil projects.

On the demand side, we don’t expect to see much of an effect from a Biden victory in the short term. After all, the more stringent Obama-era fuel economy standards had little visible impact on US gasoline demand. (See Chart 2.)

Chart 2: US Implied Gasoline Consumption
(Mn. BpD, 4-Week Mov. Avg.)

Sources: EIA, Capital Economics

One further upshot is that Biden’s environmental policies may provide a boost to the relative price of WTI crude oil compared to the more global benchmark, Brent, if in the short term US supply is slow to grow and demand remains relatively flat.

Oil prices to fall in medium term

We suspect the impact of Biden’s environmental policies will only bear fruit in the medium term, acting as a drag on supply growth and eventually demand. We expect US demand to fall in any case, and oil prices to decline in real terms from 2024 onwards, as ample global supply weighs on a global market suffering from weak demand growth. Accordingly, the election of Biden will only add a little further downward pressure to the trajectory of prices in the medium term.

Biden’s proposals add weight to our view that US output is at risk of never reaching pre-virus levels (see Chart 3), as producers struggle to source financing and oil prices remain relatively low. (See our Energy Update.) But his bearing on the medium-term outlook for US supply is likely to be small, given that we expect prices to fall in real terms after 2023 (see our Energy Focus), which will have a bigger impact on output.

Chart 3: US Oil Production Forecast (Mn. BpD)

Sources: EIA, Capital Economics

And on the demand side, we think that Biden’s policies could usher in a quicker decline in US oil demand in the medium term. Biden has promised to further tighten emissions and fuel economy standards and has even suggested that 100% of new sales of light and medium-duty vehicles will (eventually) be electric. We wouldn’t be surprised if Biden implements a ban on the sale of new fossil-fuelled passenger vehicles, to come into force between 2030 and 2040. These moves should entail a speedier shift towards low-carbon passenger vehicles, such as EVs, which will probably be accelerated by pledges to reinstate and potentially expand the tax credit for EV purchases.

But it will be some time before EVs gain anywhere near a critical mass in the US. Indeed, sales of battery EVs made up just 5% of passenger vehicle sales in 2019. As such, by the time EVs have reached critical mass, we expect peak oil demand to have already occurred, at least in the developed world.

Natural gas to benefit before entering decline

We suspect that natural gas demand and prices will stand to gain in the short term. Biden’s commitments for carbon-free power generation by 2035 and a net-zero carbon economy by 2050 imply that the US will have to first reduce its use of coal sharply. As a cleaner-burning fuel than coal, natural gas demand is likely to benefit from a more aggressive shift away from coal. But it’s worth remembering that this trend is already underway. (See Chart 4.) Accordingly, the potential positive impact on natural gas demand and consequently Henry Hub prices will be limited.

Chart 4: US Power Generation Mix (%)

Sources: EIA, Capital Economics

On the supply side, Biden has promised not to ban fracking, but he is also likely to reinstate limits on flaring and methane emissions, which will raise costs for natural gas producers. But just like for oil, we don’t think this will have much of a bearing on supply in the short term.

In the medium term, we expect US natural gas demand and Henry Hub prices to wane if the US is on track to achieving a carbon-free power generation sector by 2035. After all, natural gas is a fossil fuel and would also have to be eventually eliminated from the power generation mix.

Elsewhere, we think that a Biden victory could eventually put upwards pressure on LNG prices in the medium term, especially if growth in US export capacity is curtailed. (See Chart 5.) Biden is likely to make the Federal Energy Regulatory Commission (FERC) focus on environmental issues when reviewing infrastructure plans, which could delay or deter additional LNG export capacity.

Chart 5: Global LNG Export Growth
(Bn. Cubic Metres per Year)

Sources: BP, Capital Economics

Coal to face accelerated phase-out

Biden’s commitment to achieving carbon-free power generation by 2035 will have clear negative consequences for US coal demand and US coal prices in both the short and medium term.

But given that US consumption of coal has already been in decline for several years (see Chart 4 again) and is around eight times smaller than that of China (see Chart 6), it is unlikely that this will have a significant impact on the global price.

Chart 6: US & China Coal Consumption (Exajoules)

Sources: BP, Capital Economics

Biden victory to give limited lift to US steel price

Biden’s infrastructure spending proposals should boost the demand and prices of some industrial metals, particularly those that are used heavily in infrastructure, such as US steel. But we would caution that any gains in prices are likely to be limited and short-lived for three key reasons.

First, supply would be incentivised. US steel producers are fairly price sensitive and output can often respond quickly. This was the case in 2018 when Trump imposed 25% import tariffs on steel. (See Chart 7.)

Chart 7: US Steel Production Capacity Utilisation (%)

Sources: Refinitiv, Capital Economics

Second, any boost to demand would be fairly small. The US is only a small consumer of metals compared to China. (See Chart 8.) What’s more, $2trn spending on infrastructure over 4 years would equal just over 2% of US GDP per year, which is smaller than the Chinese fiscal stimulus implemented this year (4% of GDP). And it’s worth remembering that it would take time for the approval, planning and financing of such projects.

Chart 8: Share of Global Consumption (%)

Sources: WBMS, Capital Economics

Third, we think that trade tensions between the US and countries outside of China could ease as Biden appears to want a more co-operative approach to global trade. This could involve removing or easing the import restrictions on steel and aluminium that President Trump imposed, which could temper any increase in US steel prices. Nevertheless, we suspect that the US-China relationship will deteriorate further regardless of victor, as there appears to be bipartisan support for holding China to account. (See our Global Economics Update.)

Biden victory won’t stop gold price advancing

Prices of precious metals are unlikely to be much affected by Biden, given that monetary policy in the US will remain independent.

The Fed has stated that monetary policy will remain loose for some time and that inflation will be allowed to overshoot its 2% target. We suspect that US real yields will be the key driver of prices. And regardless of who wins in November, we think that real yields will fall a touch over the next few years, which would boost the prices of non-interest-bearing assets such as gold. (See our Precious Metals Update and Chart 9.)

Chart 9: Gold Price & US 10Y TIPS Yield

Sources: Refinitiv, Capital Economics

Corn demand to benefit in short term

The impact on the prices of agricultural commodities from a Biden victory is likely to be fairly small. The US share of world production and consumption suggests that soybeans and corn markets would be most affected. (See Chart 10.)

Chart 10: US Share of Global Agriculturals Production and Consumption (%)

Sources: USDA, Capital Economics

Given his support for ethanol (and other biofuel) blending requirements, a Biden victory could provide some upside for corn demand. The US is the world’s largest corn producer and around 40% of US output is used domestically to produce ethanol. (See Chart 11.) Under Trump, the number of waivers given to oil refineries (freeing them of obligations to blend biofuels into fuel) quadrupled. If Biden were to reverse these waivers, that should provide a structural boost to corn demand and prices.

Chart 11: Average US Share of Corn Usage by Sector
(2015/16 – 2018/19)

Sources: USDA, Capital Economics

What’s more, we think that Biden’s less aggressive approach to trade would reduce the risk that US agricultural exports are hurt by another set of retaliatory tariffs. Notably, soybeans were caught in the crossfire of Trump’s trade war, with the imposition of a 25% tariff on US exports to China contributing to a sharp drop in demand and prices. (See Chart 12.)

Chart 12: Soybean Price (US Cents per Bushel)

Sources: Refinitiv, Capital Economics

But the upside for prices is probably limited, as further US-China decoupling is likely whatever the outcome of the election. And though China has been ramping up its purchases of US agricultural products more recently, we suspect that much of this buying reflects a rise in China’s import needs. (See our Commodities Update.) With US-China relations in disrepair, it will be important to pay attention to China’s plans to achieve its ‘dual circulation’ strategy and improve its domestic food security.

Meanwhile, we think that subsidies to US farmers will remain fairly generous regardless of the election outcome. Under Trump, payments to farmers ballooned to record highs (see Chart 13), as he attempted to compensate for the damage inflicted by tariffs and COVID-19.

Chart 13: US Government Direct Farm Payments
(US$ Bn.)

Source: USDA, Capital Economics

Net zero to drag on corn demand in medium term

In the medium term, Biden’s targets for net-zero emissions and accelerating the deployment of electric vehicles would probably act as a headwind to ethanol-based corn demand. Indeed, we think biofuels will end up losing out to other cleaner energy sources further ahead. What’s more, this transition seems likely eventually regardless of the election outcome, and Biden’s green policy initiative would only speed up the process.

What are the main risks to our forecasts?

We think that there are two key risks to our short-term forecasts. First, there is a risk around the scale of a potential Biden victory. If the Democrats fail to gain control of the Senate, then any potential legislative agenda from Biden will be severely hampered. This would severely limit the scope and scale of any Biden pledges, including efforts to decarbonise the US economy and invest in green energy infrastructure.

Second, even if the Democrats win a ‘clean sweep’, there would still be considerable uncertainty over the composition of any short-term fiscal package, given the competing urgent priorities of keeping the economy afloat and the longer-term goals of infrastructure spending and combatting climate change. (See our US Economics Update.) The swift passage of a short-term stimulus bill could risk delaying the implementation of longer-term goals and policy objectives.

Conclusion

All told, we suspect that a Biden victory in November will prove a tailwind to natural gas, corn and US steel prices in the short term, while coal and oil will face headwinds. But in the medium term, we think fossil fuel prices will all face a structural decline in demand, weighing on prices, regardless of the election outcome.


James O’Rourke, Commodities Economist, +44 20 3927 9834, james.orourke@capitaleconomics.com
Samuel Burman, Assistant Commodities Economist, samuel.burman@capitaleconomics.com
Nicholas Farr, Assistant Economist, nicholas.farr@capitaleconomics.com