In a July 18 Barchart article on the energy sector in Q2 2024 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.
Nearby NYMEX WTI crude oil prices were at the $82.84 per barrel level on July 17 and have moved lower over the past weeks. However, the U.S. political landscape has changed since mid-July, and tensions in the Middle East have escalated. While crude oil prices have moved lower, the potential for a sudden price recovery is rising.
Crude oil has made lower highs and lower lows
While the nearby NYMEX crude oil contract was at $82.83 on July 17, the NYMEX futures for October delivery were around the $80 per barrel level.
The nine-month chart shows a bearish trading pattern since the mid-April 2024 high. October futures traded to an $83.45 high on April 12. The most recent low was at $65.27 on September 10. Crude oil remains in a bearish short-term trend below the $70 level in early September.
The U.S. political landscape changed
Former President Trump was leading in the polls when I wrote my Q2/Q3 crude oil report. One of his primary campaign promises is to tap the vast U.S. fossil fuel reserves to establish energy independence from OPEC+ and increase revenues with exports. I wrote, “With the potential for a second Trump administration rising, we could see lower oil prices over the coming years.”
The 2024 election season has been full of surprises, from an attempted assassination of the former President to the incumbent stepping aside and his Vice President receiving the party’s nomination. The polls have flipped, with Vice President Harris taking a slight lead in early September. Meanwhile, the race remains very close as a handful of swing states will decide the net U.S. President.
A Harris administration will likely follow the current energy policy path, supporting alternative and renewable production and consumption and inhibiting fossil fuels. Meanwhile, a second Trump administration will increase drilling and fracking. The close race could cause lots of volatility in crude oil prices over the coming weeks. I view a Harris victory as bullish for crude oil prices and a Trump victory as bearish.
The Middle East remains a tinderbox
While the future U.S. energy policy will impact the path of least resistance of crude oil futures, the escalating tensions in the Middle East are a clear and present threat to petroleum supplies. With Iran supporting proxies in the region and the U.S. support for Israel, the conflict threatens to widen, which could involve actions against Iranian crude oil production and refining. While bombing Iranian petroleum assets could cause price spikes, conflicts around logistical routes in the Persian Gulf and Straits of Hormuz could also cause supply fears that elevate crude oil prices over the coming weeks and months.
Seasonality and levels to watch in NYMEX crude oil futures
Gasoline is the most ubiquitous crude oil product, powering most vehicles worldwide. The peak driving season is spring and summer, when gasoline prices tend to reach annual peaks. Gasoline prices often decline during the fall and winter as drivers put fewer clicks on odometers. Therefore, crude oil prices tend to trend lower during these months.
However, the U.S. election and turmoil in the Middle East could easily trump seasonality.
The five-year chart highlights technical support at the May 2023 seasonal $63.57 low, with technical resistance at the July 2024, $84.52 high. A move above that level would negate the current bearish trend.
UCO and SCO are crude oil proxies
Seasonality is a powerful force in commodity futures markets, and crude oil is no exception. However, the U.S. domestic and geopolitical landscapes and signals that U.S. interest rates will be falling over the coming months are not bearish for the energy commodity as it moves into the fall and winter of 2024/2025. Trading crude oil could be the optimal approach as the factors impacting prices could continue to pull the energy commodity in opposite directions.
The most direct routes for a risk position in crude oil are the CME’s NYMEX WTI futures or the ICE Brent futures. Both futures are highly liquid and offer futures options. The Ultra Bloomberg Crude Oil 2X ETF (UCO) and the Ultrashort Bloomberg Crude Oil -2X ETF (SCO) are short-term leveraged ETFs that track NYMEX crude oil futures on the up and downside. UCO and SCO are only appropriate for short-term trading risk positions as they suffer from time decay when the energy commodity moves contrary to expectations or when prices remain stable. The cost for the leverage is time decay.
At $25.04 per share, UCO had over $618.25 million in assets under management. UCO trades an average of nearly 3.5 million shares daily and charges a 0.95% management fee. UCO is a short-term asset that turbocharges crude oil prices on the upside on a percentage basis.
At $19.88 per share, SCO had over $102.3 million in assets under management. SCO trades an average of over two million shares daily and charges the same 0.95% management fee. SCO is a short-term trading tool that magnifies bearish price action in NYMEX crude oil on the downside.
Seasonality could be the oil market’s least concern over the coming weeks and months as the geopolitical, U.S. domestic, and economic landscapes could have a far more significant impact on the energy commodity’s price. UCO and SCO could be excellent short-term trading tools over the coming weeks.
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.
