The Commodities Feed: Oil Plunges Following US Midterm Elections

Energy markets are under significant pressure following the Democrats’ clean sweep in the US midterms as hopes grow that the political shift could accelerate efforts to bring the war with Iran to an end

Energy – Middle East optimism grows following US election

Oil markets sold off aggressively yesterday, with ICE Brent settling 8.7% lower on the day and below $95/bbl. Selling pressure has only continued in early morning trading today. The outcome of the US midterm elections, with the Democrats winning both the House and Senate, has increased hopes that we could see a quicker end to the war in Iran. Given the Democrats’ control of Congress, there will likely be more scrutiny over the war, while funding it could become more difficult. The outcome of the elections means there could be more pushback from the Republican Party, too. Yet the new senators and members of the House start in January, leaving room for President Trump to escalate if he wants. Trump has suggested there are no imminent plans to strike Iran.

How all this plays out is still highly uncertain. Therefore, the degree and speed to which the oil market has sold off seems to be overdone. One would think Trump might want to come away with some accomplishments from this war. Does he go about that through renewed strikes or striking a deal? Or by continuing to put pressure on Iran with the ongoing maritime blockade? In the lead-up to the midterms, all signals pointed towards Trump resuming strikes. This is less clear now.

In the absence of escalation, the oil market is likely to continue to slowly give back the risk premium it built in recent months, with oil flows from the Persian Gulf holding up well. This risk premium could disappear even quicker if there’s some sort of agreement between the US and Iran. Fundamentally, the oil market is looking increasingly softer, reflected in the weakening in the physical market as well as timespreads.

Inventory data from the EIA yesterday showed that US commercial crude oil inventories fell by 865k barrels over the last week. When including releases from strategic reserves in total crude, inventories fell by 1.26m barrels. Meanwhile, changes on the refined product side were even more supportive, particularly for middle distillates. Despite refineries increasing their utilisation rates by 1.7 percentage points over the week to 94.5%, distillate fuel oil inventories still fell by 3.57m barrels. This took total distillate stocks below 100m barrels for the first time since 2003. Gasoline inventories also edged lower by 222k barrels.

European gas prices also sold off yesterday amid hopes the US midterms outcome could lead to a quicker recovery in LNG flows. TTF fell by more than 3.8%, and pressure has continued this morning, leaving it trading around the EUR85/MWh level. However, fundamentally, the European gas market remains tight. Storage has started drawing with the heating season now underway. EU storage stands at 74% full. Where we come out the other side of winter is largely dependent on how much of a recovery we see in Persian Gulf LNG flows this winter, if any. And, of course, given the tighter market, weather is going to be even more important than usual through the winter.

Metals – Gold surges back above $4,000/oz

Spot gold jumped more than 3% yesterday, climbing back above $4,000/oz following a Democratic sweep in the US mid-term elections. Expectations of legislative gridlock, lower Treasury yields and a weaker dollar are supporting the move.

Meanwhile, central bank buying continues to provide underlying support, with official-sector demand remaining strong in September. Central banks added 61 tonnes during the month, according to the World Gold Council, while third-quarter purchases reached 228 tonnes (-7% year-on-year). Poland and China continued to lead purchases, reinforcing the structural demand story for gold.

Despite the rebound, the near-term outlook remains challenging for the precious metal. Inflation concerns continue to support expectations for tighter monetary policy. But much depends on developments in the Middle East and what they mean for energy markets.