In my Q1 energy report on Barchart, I highlighted that crude oil and oil product prices rose over the first three months of 2024 and were higher than the March 2024 closing level in April. Many analysts call for higher oil prices over the coming months, and the odds of significant upside spike have increased. The geopolitical landscape in the Middle East supports oil prices along with seasonality as the energy commodity moves towards the peak 2024 driving season.
The two petroleum benchmarks are Brent North Sea crude oil futures on the Intercontinental Exchange and West Texas Intermediate petroleum futures on the CME’s NYMEX division. The U.S. Oil Fund (USO) tracks the WTI NYMEX futures, while the U.S. Brent Oil Fund (BNO) moves higher and lower with ICE Brent futures.
Crude oil prices are in a bullish trend
Crude oil prices have been in a bullish trend over the past year.
The one-year chart of NYMEX WTI crude oil futures highlights the bullish pattern of higher lows and higher highs. June futures have risen 38.8% from $62.65 on May 4, 2023, to the latest $86.97 high on April 12, 2024. At over $83 per barrel in late April, nearby NYMEX futures are not far below the recent peak.
Nearby June Brent crude oil futures have followed the same path, rising 32.6% from $69.54 on May 4, 2023, to $92.18 on April 12, 2024. Brent futures remain on a bullish path at near the $90 level in late April.
War in the Middle East is bullish- An escalation could be explosive
Oil prices began their ascent before the October 7, 2023, terrorist attack on Israel that started the current conflict. As Iranian-backed proxies continued to attack Israel, the Israeli armed forces moved into Gaza, increasing the tensions. After bombing Iran’s embassy in Syria, Iran launched over 300 missiles towards Israeli territory in the latest escalation and Israel responded with an attack on Iranian soil. As the world waits prepares for further possible hostilities, the potential for further escalation is a clear and present danger.
Iran’s alliance with Russia and China and U.S. and European backing for Israel has significant ramifications for world peace and energy prices. Iran produces between three and four million barrels of petroleum daily. Any attack on Iranian production or refining assets could cause a sudden spike in oil prices. Moreover, the Straits of Hormuz is a critical logistical chokepoint for crude oil supplies. Iran’s military control in the region could lead to substantial price volatility in the oil patch. The bottom line is conflicts in the Middle East and the rising potential for escalating hostilities support higher oil prices.
The U.S. SPR remains low- Fewer bullets to address high oil prices
In November 2021, the U.S. Strategic Petroleum reserve was at over 600 million barrels. As of April 19, 2024, the SPR was over 39% lower at 365.70 million barrels. The Biden administration sold unprecedented SPR barrels in 2022 when crude oil prices rose over the $130 level, the highest price since 2008. Russia’s invasion of Ukraine and the highest inflation since the 1980s caused the price spike. The U.S. administration sold at a $95 per barrel average price. In an October 2022 White House Fact Sheet, the administration stated its intention to replenish the SPR when crude oil prices fell to a $67-$72 per barrel range. While prices fell below the bottom end of the target range, the administration did not buy nearly enough petroleum to build the SPR back to pre-2022 levels.
The low SPR level means the administration will have fewer barrels to sell if another oil price surge because of the conflict in the Middle East occurs.
U.S. traditional energy production is on the November ballot
The trend is always your best friend in markets, and it remains higher in crude oil in April 2024. Moreover, the start of the driving season means increasing gasoline demand, putting upward pressure on oil prices. If China’s economy improves, energy demand could soar in an environment where Middle East turmoil could diminish supplies.
Crude oil and energy policy will be on the ballot in early November in a repeat of the 2020 Presidential Election. President Biden seeks a second term, as does former President Trump. The polls are neck-and-neck six months before the contest.
President Biden and his administration supports addressing climate change by encouraging alternative and renewable fuels and inhibiting fossil fuel production and consumption. Former President Trump and Republicans favor a “drill-baby-drill” and “frack-baby-frack” approach to hydrocarbon production, making the U.S. energy independent and increasing exports. The election results will significantly impact crude oil prices in 2025. Oil prices were lower under the former President’s administration than during the current administration.
USO and BNO are ETFs that track the leading crude oil benchmarks
WTI and Brent crude oil are the two pricing benchmarks. WTI is the barometer for North American crude oil, while Brent is the pricing mechanism for petroleum from Europe, Africa, Russia, and the Middle East. While there are many other crude oil grades and qualities, they trade at discounts or premiums to the WTI and Brent benchmark prices.
The most direct route for a risk position in the oil market is via the futures and futures options for WTI on the CME’s NYMEX division or the Brent on the Intercontinental Exchange. The U.S. Oil Fund (USO) tracks the WTI NYMEX futures, while the U.S. Brent Oil Fund (BNO) moves higher and lower with ICE Brent futures for market participants looking for crude oil exposure without venturing into the futures arena.
At $79.79 per share, USO had $1.705 billion in assets under management. USO trades an average of over 4.94 million shares daily and charges a 0.81% management fee. The most recent June NYMEX crude oil rally took the price 25.9% higher from $69.06 on December 13, 2023, to $86.97 on April 12, 2024.
Over the same period, USO rose 30.7% from $63.84 to $83.41 per share.
At $32.38 per share, BNO had $134.675 million in assets under management. BNO trades an average of 516,889 shares daily and charges a 1.09% management fee. The most recent June ICE crude oil rally took the price 25.7% higher from $73.36 on December 13, 2023, to $92.18 on April 12, 2024.
Over the same period, BNO rose 30.8% from $25.92 to $33.91 per share.
USO and BNO do an excellent job tracking the futures on the two petroleum benchmarks. Markets reflect the economic and geopolitical landscapes. In April 2024, stubborn inflation and conflicts are bullish for crude oil prices over the coming months, but the November election that determines the future of U.S. energy policy could cause lots of price variance in late 2024 and into 2025.
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.
