Crude oil futures are not for the faint of heart. In April 2020, the nearby NYMEX futures dropped below zero for the first time since trading began in 1983, reaching negative $40.32 per barrel as there was nowhere to store the energy commodity. Less than two years later, in March 2022, the nearby price rose over $170 to a $130.50 high, the highest price since the 2008 $147.27 record high. In a May 28 Barchart article on crude oil, I wrote:
Discipline is crucial when positioning in crude oil. While I favor a long approach to crude oil at the current price levels, a break below the late 2023 lows could ignite a speculative plunge. Conversely, a rally that takes the energy commodity above the September 2023 highs could result in an explosive move to the upside. Crude oil could be near a significant bottom, but any risk position requires careful attention to risk-reward dynamics.
Nearby August NYMEX futures were at the $80.71 per barrel level on June 18 and have made lower lows until breaking above short-term technical resistance on June 18.
Crude oil searched for a bottom
Nearby NYMEX July crude oil futures reached $86.16 per barrel on April 12 when they ran out of upside steam.
The chart shows that the WTI futures made lower highs and lower lows, with the latest low on June 4 at $72.44 per barrel. On June 17, the energy commodity broke above the first resistance level at the May 29 $80.11 high.
August Brent crude oil futures have followed the same bearish path, falling from $90.18 on April 12 to $76.75 on June 4. On June 18, Brent futures moved over the May 29 $84.71 high and closed over the $85 level, a short-term bullish technical break out.
The OPEC meeting was bearish
At the June 1 biannual OPEC meeting, the international oil cartel extended most of its oil output cuts into 2025 because of weak demand, high interest rates, and U.S. oil output at 13.1 million barrels per day. Meanwhile, OPEC+ (including Russia) will gradually phase out the production cuts of 2.2 million barrels per day from October 2024 through September 2025. The market interpreted the production policy as a bearish sign, and crude oil prices declined after the latest OPEC meeting.
The wars are bullish
The war in Ukraine remains a bullish factor as Russia is the leading non-member of the international oil cartel. Russia depends on crude oil revenues, leading to support for the highest possible petroleum price. Moreover, the war in the Middle East that has involved Iran, is a potentially explosive factor for oil prices. Iranian production and refining capacity are a target for Israel and its allies. Critical logistical routes in the Persian Gulf and Straits of Hormuz are potential flashpoints for conflicts over the coming weeks and months. The bottom line is the two wars are a bullish factor for crude oil that could continue to support higher prices and cause periodic upward price spikes.
China is a critical issue
When it comes to weak global oil demand, China is at the center of the stage. Economic weakness in the world’s second-most populous country and second-leading economy has weighed on crude oil demand and prices.
OPEC+ has repeatedly cited slack demand from China as a reason for production cuts. When the Chinese economy emerges from the current malaise, crude oil demand could storm back even if OPEC increases output. China is the critical factor in the path of least resistance of oil prices over the coming months.
The U.S. election could determine if prices explode or tank
U.S. energy policy for the coming years will be on the ballot on November 5. The Biden administration supports a greener path of energy production and consumption, encouraging alternative and renewable fuels while inhibiting fossil fuels. Another term for the current administration could see increased regulations that keep OPEC+ in the driver’s seat, with its production policy determining the marginal crude oil barrel that determines the price path.
Meanwhile, former president Trump and his Republican colleagues support a “drill-baby-drill” and “frack-baby-frack” approach to traditional energy. A Trump administration would likely open a flood of U.S. crude oil production, increasing daily output from the current 13.1 million barrels daily. A second Trump administration’s energy policy would encourage U.S. energy independence and increase exports.
A Biden victory would likely keep a bid under crude oil prices, while a Trump November win could send prices significantly lower.
Expect crude oil prices to remain steady to higher until November, with the potential for periodic explosive rallies. The election will likely determine the path of least resistance for the energy commodity that continues to power 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.
