Analysis: Oil Markets Brace for Post-Election U.S.


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Energy market participants are repositioning themselves 
ahead of next week's U.S. midterm elections -- the results and after-effects of 
which could result in sweeping changes for the oil complex.

   Growing signs the U.S.-Iran war is set to enter a new phase following the 
elections -- perhaps even independently of its outcome -- is keeping the market 
squarely focused on geopolitical impacts and supply risks.

   With the Republican government trifecta very likely to end with all 435 
seats in the House of Representatives and 35 of 100 Senate seats up for grabs, 
the executive branch is not only bracing for an avalanche of legal challenges 
but will have to contend with wielding considerably less political capital.

   Domestic energy and environmental policies, however, are far from being at 
the forefront of oil traders' minds, as high prices and war-induced supply 
disruptions have this year shaped the market significantly more than the 
slashing of regulations or the granting of drilling licenses.

   Iran War

   Notwithstanding the changes to Congress and Senate, risks of a re-escalation 
in the U.S.-Iran war after the elections have been mounting. Some observers 
have attributed the recent U.S. military constraint toward Iran to an attempt 
to soften the war-induced political fallout on the domestic front, a 
consideration that would lose relevancy after November 3.

   U.S. President Donald Trump, who on the campaign trail this month struck an 
increasingly bellicose tone vis-a-vis Iran, has been briefed multiple times on 
strike options, including on Thursday by the head of central command. Trump has 
said the U.S. may deliver a decisive blow to Iranian forces after the election.

   In addition, several reports over the past few weeks have indicated that 
Israel and Washington were independently reviewing strike options for November 
-- suggesting that their intense 40-day air raid through early April against 
Iran might recur.  With Trump ally and Israeli Prime Minister Benjamin 
Nethanyahu set to remain in office after this week's election unless unseated 
by an opposition coalition, the likelihood of a renewed joint campaign by the 
two against Iran only grows.

   Concerns of a reheating war and consequently worsening oil supply disruption 
have been fueled by the recent deployment of a third U.S. aircraft carrier 
strike group and several amphibious landing units to the region, expected to 
reach Iranian shores by the end of November.

   While largely in the hands of the executive branch, the outcome of the 
midterm elections can also contribute to a reshaping of Iran policy, with a 
majority Democratic Senate likely to push for a diplomatic resolution.

   Russian Sanctions

   The White House's move earlier this month to suspend sanctions on Russia and 
grant a general license allowing for U.S. imports of Russian diesel was met 
with harsh criticism even among Republican ranks. The new sanctions bill, which 
was suspended via executive order just days before it was set to be enacted, 
had passed both chambers of Congress with bipartisan support, and was sponsored 
by some of the President's closest political allies.

   Opinion polls and betting markets are predicting the Democratic party to win 
a majority of House seats in next week's midterm elections, and are attributing 
a high likelihood to the opposition party also retaking majority control of the 
Senate. Unless the Oval Office intends to govern exclusively via executive 
order, a Democratic Senate majority drastically increases the chances that the 
U.S. government may return to the sanctions regime it had pursued since 
Russia's invasion of Ukraine in 2022.

   Although Russian refiners are currently struggling to raise export volumes 
anywhere close to their heyday, the loss of this diesel supply stream will 
still mean a further tightening of the market. In addition, losing the Senate 
could force the White House to pump the brakes on recent behind-the-scenes 
efforts to reestablish economic cooperation and trade with Russia.

   Domestic Policy

   The oil market is also bracing for the potential of stricter regulations 
affecting the entire fuels supply chain, from drilling to engine efficiency 
requirements. Given the massive inflationary pressures stemming from eight 
months of high oil prices, however, Democratic lawmakers may be reluctant to 
immediately pursue any legislation that would further tighten the supply screws 
or raise prices. Additionally, most industry players have held on to the view 
that the fossil fuel friendly policies of Trump's second administration are 
less the herald of a sea-change, but rather a temporary slowdown of an 
inevitable transition away from oil.

   The Middle Eastern oil supply disruption and its ripple effects continue to 
dictate the direction of the market significantly more than regulatory changes. 
Given the world is running dangerously low on cushions that can absorb future 
supply shocks, short-term considerations about the Iran war are this time 
likely to outweigh regulatory woes.




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