Oil markets surge as crude stockpiles drop amid U.S. election

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Oil markets surged on Wednesday as the uncertainty that enveloped the U.S. presidential election was overshadowed by a big drop in the country’s crude oil stockpiles.

The usual factors influencing energy won a tug-of-war over market bets on potential policy implications for the industry as West Texas Intermediate crude rose 4 per cent to settle at US$39.15 a barrel. Prices had been stuck in a range around US$40 since the summer but turned volatile in recent weeks as election day approached after a bitter campaign marked by starkly contrasting views on energy and the environment.

“It’s rare to see the oil market dance to the beat of its own drum, but we saw a massive [drawdown of stockpiles] today, revealed by the EIA,” said Michael Tran, an energy market strategist for RBC Capital Markets, referring to a report by the U.S. Energy Information Administration. Also supporting crude was a large withdrawal of distillates, such as diesel and jet fuel, he said.

This suggests that the U.S. economy keeps strengthening after the massive drop in energy demand caused by lockdowns in the spring that were aimed at slowing the spread of COVID-19. “We have seen strong tailwinds [today],” Mr. Tran said.

In a bullish signal for the oil price, the U.S. EIA reported that inventories fell by eight million barrels in the United States in the week ended Oct. 30, a much larger drawdown than many analysts had expected. During the week, Hurricane Zeta forced production outages in the Gulf of Mexico, adding to the pressure on supplies.

U.S. stock markets also made big gains on the day, despite there being no clear winner in the race between President Donald Trump and his Democratic challenger, Joe Biden. The Senate race also remained unresolved. The prospect of a drawn-out political and legal battle loomed large but the S&P 500 rose 2.3 per cent and the Nasdaq gained 3.6 per cent.

Canadian oil and gas stocks were muted, with the S&P/TSX capped energy index slipping 0.2 per cent. The outcome of the election could determine whether TC Energy Corp.'s Keystone XL pipeline from Canada to the southern United States goes ahead after a dozen years of delay, or gets blocked under a Biden administration. Mr. Trump has approved the project, but it is still subject to court challenges. Mr. Biden has said, if elected, he would rescind its federal permit.

On the energy policy front, Mr. Trump has sought to portray Mr. Biden as anti-oil for his statements on transitioning the American economy away from fossil fuels in the fight against climate change. He also tried to sway voters into seeing Mr. Biden as a foe of fracking, especially in states such as Texas and Pennsylvania, where the drilling and production technique is widely used.

Mr. Biden, meanwhile, has pushed an agenda that includes much more investment in wind and solar power as well as other renewable sources while pledging to recommit the United States to the Paris accord on reducing greenhouse gas emissions. The United States' withdrawal from the global pact, instituted by Mr. Trump, became official on Wednesday, and the outcome of the election will determine whether that will be reversed.

Renewable energy shares fell as the outlook for Mr. Biden’s clean technology and job creation policies became murkier. The iShares Global Clean Energy ETF fell more than 1 per cent. Big Canadian player Brookfield Renewable Partners LP sank more than 3 per cent.

Risks for oil markets remain as long as the election uncertainty hangs over the United States, said Bjornar Tonhaugen, head of oil market research at Oslo-based Rystad Energy. Indeed, the Trump campaign sued to stop vote counting in Pennsylvania and Michigan on Wednesday.

“This in turn could spawn further selloffs within risky asset classes, including oil futures,” he said in a research note. "This scenario becomes increasingly likely if Biden secures a very narrow victory, which would likely be contested in court by the Trump administration and the Republican Party.”

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