In a November 8, Barchart article on crude oil, I addressed whether crude oil will hold technical support after the 2024 U.S. election. I concluded the article with the following:
Geopolitical events, U.S. energy policy, and China’s economy will determine the energy commodities path of least resistance over the coming months and years. In late 2024, bullish and bearish factors are causing the price to remain around the $70 level. However, the election results favor the downside, and I believe we will see crude oil below $50 per barrel in 2025, and perhaps as low as $40 per barrel. I am a buyer of the SCO leveraged ETF product with tight time and price stops. I will reestablish a long position in SCO if stopped out in the current political and financial environment.
On November 8, nearby NYMEX crude oil was trading at $70.09 per barrel, with the leveraged SCO bearish crude oil ETF product at $17.73 per share. In early December, January NYMEX crude oil futures were slightly lower at around $69.50 per barrel, and the SCO bearish leveraged ETF was maringally higher at around $17.90 per share.
Crude oil is going nowhere fast
Nearby NYMEX crude oil prices have traded in a tight range since early November.
The daily chart of NYMEX crude oil for January delivery shows the energy commodity has traded between $66.53 and $72.41 per barrel since November 6. The continuous contract’s range for 2024 has been from $65.27 to $87.63 per barrel. Crude oil is trading closer to the bottom end of this year’s trading range.
The new administration takes over on January 20, 2025
On November 5, the U.S. elected former President Donald Trump to a second nonconsecutive term. Energy policy was on the ballot. Vice President Harris had pledged to continue the Biden administration’s energy path of addressing climate change by supporting alternative and renewable energy and inhibiting fossil fuel production and consumption. The President-elect promised to return to a “drill-baby-drill” and “frack-baby-frack” traditional energy policy to establish energy independence, reduce inflationary pressures, and increase revenues by making the U.S. the world’s leading oil and gas exporter.
The new administration will take over on January 20, and President-elect Trump has pledged that promises made will be promises kept. As of the week ending on November 15, the U.S. was producing 13.201 million barrels of crude oil per week. The pivot in U.S. energy policy will likely increase petroleum output, perhaps significantly, in 2025 and the coming years.
The bullish case for the energy commodity
Meanwhile, factors continue to underpin crude oil prices in early December 2024. The following issues support higher petroleum prices:
- The hostilities in the Middle East threaten Iranian crude oil output and crucial logistical routes in the Persian Gulf and the Straits of Hormuz. Conflicts in the region could suddenly lift crude oil prices.
- Chinese economic stimulus could increase the demand for crude oil. China is the world’s second-leading economy. In late 2024, the Chinese government cut interest rates and reduced bank reserve requirements to stimulate the economy and achieve 5% GDP growth.
- Russia cooperates with Saudi Arabia and the other OPEC members on production policy. If the international oil cartel reduces production, it could put upside pressure on crude oil prices.
Crude oil is a highly political commodity that could experience upside price pressure if Middle East supplies decline.
The bearish case for crude oil
The bearish case for crude oil includes the following:
- Elections have consequences. The Trump administration will increase U.S. crude oil output dramatically, causing prices to decline to $50, or even $40 per barrel.
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NYMEX crude oil has been in a bearish trend since March 2022, when it reached $130.50 per barrel, making lower highs. While the 2024 continuous contract low was $65.27 per barrel, critical technical support is at the May 2023 low of $63.57. A decline below that price could cause further selling to descend on the crude oil futures market.
- The ten-year monthly NYMEX crude oil chart highlights the $63.57 technical support level. Below there, the next critical level is at the December 2021 $62.43 low. A decline below the 2021 bottom could lead to freefalling prices.
- Meanwhile, in the past, OPEC had addressed increasing U.S. oil production by flooding the market with petroleum, making U.S. production uneconomic. Another output war in 2025 could cause prices to fall appreciably from the current levels.
I remain long SCO, using a trading strategy to minimize losses and maximize potential profits
I continue to believe that we will be seeing crude oil prices fall over the coming months and years. President-elect Trump has pledged to return consumer gasoline prices to levels seen during his first administration. Nearby NYMEX gasoline prices traded from a pandemic-inspired low of 46.05 cents in March 2020 to a high of $2.2804 per gallon wholesale in May 2018 during his first term. Wholesale gasoline futures under the Biden administration have traded as low as $1.8726 and as high as $4.3260 per gallon wholesale. Gasoline prices follow NYMEX crude oil prices, which traded below zero to a $76.90 high during the first Trump administration and a $47.18 to $130.50 per barrel range during the Biden administration. The low during the current administration came in January 2021 when President Biden took office.
On November 5, U.S. voters chose lower energy prices over addressing climate change through the current energy policy path. The odds favor lower oil prices over the coming months and years. The Bloomberg Ultrashort Crude Oil -2X ETF product (SCO) creates leverage through options and swaps to achieve twice the downside price action in NYMEX crude oil prices. SCO’s most recent top holdings include:
SCO is a short-term trading tool that appreciates when NYMEX crude oil futures prices decline. The leverage comes at a price, which is time decay. The SCO ETF quickly loses value if crude oil moves higher or remains stable. Therefore, price and time stops are critical when considering SCO to benefit from declining crude oil futures prices.
SCO is a liquid ETF. At $17.99 per share, SCO had around $107.2 million in assets under management. SCO trades an average of over 1.168 million shares daily and charges a 0.95% management fee.
The trend in any market is always your best friend, and crude oil’s path of least resistance since the 2022 high has been lower. A fundamental shift in the U.S. energy policy that increases petroleum output could be very bearish over the coming months, which favors higher prices for the SCO ETF, which benefits from falling crude oil futures prices.
