Nearby NYMEX WTI crude oil prices edged 1.96% lower in Q2 but were 13.8% higher over the first six months of 2024. The NYMEX contract settled Q2 at $81.54 per barrel. Prices moved lower in July and early August.
In a July 18 Barchart article, I highlighted where the energy sector was heading in Q3 and beyond. I concluded:
The bottom line is that we should expect volatility in the traditional energy commodities over the second half of 2024 as uncertainty over the U.S. policy path could cause significant price variance in the energy futures arena. With the potential for a second Trump administration rising, we could see lower oil prices over the coming years.
Meanwhile, a lot has changed in the political arena since mid-July, making the path of least resistance for crude oil prices highly uncertain.
Crude oil is in a bearish trend as the end of the 2024 driving season approaches
After reaching an $83.58 per barrel high on July 5, NYMEX crude oil for September delivery has made lower highs and lower lows.
The three-month chart highlights a 14.25% decline to $71.67 on August 5. With the summer more than half over, the driving season will end as the fall begins, and the demand for gasoline, the most ubiquitous crude oil product, will decline.
A change in the political landscape creates uncertainty
The U.S. election is a critical factor in the path of least resistance of crude oil prices. The Biden administration’s commitment to climate change initiatives strengthened OPEC+’s position in worldwide petroleum pricing. The current President has stepped aside, endorsing his Vice President, Kamala Harris. VP Harris has caused polls to tighten, and a victory in November will likely continue to current energy policies.
Former President Trump has promised a return to a “drill-baby-drill” approach to achieving energy independence, lowering inflation, and creating significant revenues from petroleum exports. More U.S. production could send oil prices substantially lower.
The polls show a toss-up in early August, but the Vice President has established upward momentum. However, uncertainty as the election approaches could cause increased volatility, transcending seasonality through early November.
The Middle East conflict is heating up
The war in the Middle East continues as Israel continues to battle Hamas. Meanwhile, the Lebanese border has become increasingly violent as Israel faces a war on multiple borders. Attacks from Yemen’s Houthis create more issues and threaten to expand the conflict. Iran has backed Hamas, Lebanese Hezbollah, and the Houthis in the battle against Israel. The assassination of the Hamas leader has only increased the tensions. As the conflict grows, it could create significant logistical problems for transporting Middle Eastern crude oil through the Persian Gulf and Straits of Hormuz. Moreover, if other countries join the conflict, crude oil prices will likely spike higher due to supply fears. The bottom line is that the Middle Eastern tinder box is a bullish factor for the energy commodity that fuels the world.
China’s economic woes have weighed on crude oil prices over the past year, but increasing hostilities in the world’s oil patch could create shortages.
The U.S. SPR remains low
The U.S. sold an unprecedented level of crude oil from its Strategic Petroleum Reserve after Russia invaded Ukraine in early 2022. In June 2020, the U.S. SPR was at 656 million barrels, On July 26, the SPR was nearly 42.8% lower at the 375.1 million barrel level.
The low level of the U.S. SPR means the United States has limited ammunition to combat a spike in crude oil prices caused by Middle East hostilities. While seasonality will likely weigh on crude oil prices over the coming months as the winter approaches, the low SPR and OPEC+’s pricing power are not bearish for the energy commodity.
Expect a wild ride where crude oil could fall to $40 or rise to $100 per barrel- BNO, USO, UCO, and SCO are ETFs that track the energy commodity
I expect lots of volatility in the oil futures markets over the coming months. The uncertainty of the U.S. election that will decide if OPEC+’s dominant position continues or if the United States will take pricing power from the cartel is a critical factor for the path of least resistance of prices. Meanwhile, the Middle East conflict could cause sudden supply concerns, leading to upside price spikes in the blink of an eye.
Market participants holding long or short positions should not be comfortable as the potential for sudden price variance remains at the highest level in years. While passive investors detest price volatility, it creates a paradise of opportunities for flexible traders with their fingers on the pulse of markets.
The most direct routes for a risk position in crude oil are the futures and futures options in the CME’s NYMEX WTI contracts or the ICE Brent contracts. The United States Brent Oil ETF (BNO) and the United States WTI Crude Oil ETF (USO) are short-term unleveraged products that move higher and lower with the leading crude oil benchmark prices.
Meanwhile, the Ultra Bloomberg 2X ETF product (USO) provides double upside leverage for WTI oil prices, while the Ultrashort Bloomberg Crude Oil -2X ETF (SCO) offers double downside leverage for WTI petroleum prices. The leveraged ETFs suffer from time decay, so they are only appropriate for short-term trading purposes. Time decay erodes values when prices move contrary to expectations or remain stable.
Like the U.S. election, the path of least resistance of crude oil prices over the coming weeks and months is a coin toss. The election will determine U.S. energy policy and if OPEC+ retains its dominant pricing position. The war in the Middle East threatens supplies. Expect lots of price action as crude oil prices could be on a rollercoaster over the coming months, creating lots of trading opportunities. Investors may do best remaining on the sidelines until certainty returns to the energy commodity that powers the world.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
