If the polls are to be believed – and that's a big IF – ASX energy stocks like the Woodside Petroleum Limited (ASX: WPL) share price could be in for a tougher 2021.
The odds of Joe Biden unseating Donald Trump at the upcoming US presidential election just got better after the incumbent caught COVID-19.
A Biden presidency isn't a bad thing for the S&P/ASX 200 Index (Index:^AXJO) or global equities, but the same may not be said for the oil market.
ASX oil stocks facing the Biden blues
The oil price is already under pressure with the Brent crude benchmark falling to under US$40 a barrel when it was hovering near US$70 a barrel at the start of 2020.
This explains why the ASX energy sector is underperforming the broader market. The Oil Search Limited (ASX: OSH) share price crashed by 65%, the Woodside share price lost more than half its value and Santos Ltd (ASX: STO) tumbled 43% since January.
As mentioned, there may be no light at the end of the tunnel if Biden takes over the White House. There are two significant consequences for the oil market under a Biden presidency, according to the Financial Times.
Two big impacts from a Biden presidency
The first is obvious. Biden committed to re-joining the Paris Climate Agreement, pledged to spend US$2 trillion on clean energy and decarbonise the US economy.
His policy stands in sharp contrast to Trump, which has gone out of his way to support US oil and prop up the US shale producers.
The other impact from a Biden win is the possible dismantling of the OPEC+ production cuts. OPEC, led by Saudi Arabia, struck a deal with other major oil exporters like Russia to limit supply of crude to artificially put a floor to prices.
But Saudi Arabia was reluctantly dragged into the deal in April by Trump, who threatened to suspend US military support to the country.
Combustible mixture of oil and politics
Trump did this to win support in key battleground states that rely on the US shale industry, while the Saudis abandoned their resolve to teach Russia a lesson for not sticking to quotas.
The FT speculates that Biden won't be so quick to pursue a similar policy as the clean energy transition becomes his top priority.
Adding fuel to the fire
What's more, President Biden will likely reopen Iran's oil spigots – adding additional supply to a market experiencing weak demand.
Biden indicated he will recommit the US to the international nuclear agreement with Iran. This will pave the way for sanctions against the country to be lifted for the first time since 2018.
Oil investors should be on alert. A Democrat victory will have both short- and medium-term negative implications for the sector. These risks are not priced into markets.
