I highlighted NYMEX crude oil’s 16.4% Q3 decline and that the energy commodity fell 4.86% over the first nine months of this year in my third-quarter energy report on Barchart. I concluded the article with the following:
The bottom line is that bullish and bearish factors are pulling crude oil and traditional energy products in opposite directions in Q4 2024. Expect elevated of volatility in the energy sector over the coming weeks and months. In mid-October, crude oil’s path of least resistance remains a coin toss.
Nearby NYMEX crude oil futures settled Q3 at $68.17 per barrel on September 30. The futures were slightly higher on November 8 at just above the $70 per barrel level.
NYMEX crude oil heads for a challenge of technical supportNearby NYMEX crude oil futures have been trending lower since early July.
The weekly chart highlights the decline from the July $84.52 high, with crude oil futures heading towards a test of the critical support levels at the September 2024 $65.27 low and the early May 2023 $63.57 per barrel low on the continuous NYMEX WTI futures contract.
Israel’s retaliation against Iran did not lift oil prices
The latest decline in petroleum prices came after Israel’s retaliatory strike on Iranian military infrastructure. While the back-and-forth strikes by Iran and Israel continue, Israel avoided Iran’s crude oil infrastructure, which caused the price decline.
The results of the November 5 U.S. election are a watershed event. The Biden administration likely asked Israel to avoid any military actions that would cause an upward spike in the oil market, and Israel cooperated going into the election. The incoming Trump administration will take a much more aggressive stance against the Iranian leadership. Crude oil prices had been steady as the market awaited Israel’s response to the nearly 200 Iranian missiles launched weeks ago. However, the Israeli response caused selling to descend on the crude oil futures market. The Republican election sweep will at the least make Iran think long and hard before any attacks on Israel.
The Middle East remains a tinder box- The SPR is far below the January 2021 level
While crude oil fell after the recent volley of attacks, there is no guarantee that future missile attacks or hostilities in the region will not impact crude oil prices. Iran is an OPEC+ member, and its production has increased over the past years. Iran relies on oil revenues, and escalating regional tensions and conflict could eventually impact production, refining, and critical logistical routes in the Persian Gulf and Straits of Hormuz. However, there is a new sheriff that will be running the U.S. and if his previous administration was an example, hostile governments will think twice before challenging the Trump administration.
Meanwhile, the U.S. Strategic Petroleum Reserve stood at 387.2 million barrels as of November 1, 248 million barrels lower than the level in January 2021 when the Biden administration took over from the previous Trump administration. The Department of Energy sold unprecedented SPR barrels after Russia invaded Ukraine when oil prices rose to over $130 per barrel. While the DoE has been buying oil to replace the barrels, the SPR remains far below the pre-2021 levels. The U.S. produces around 13.5 million barrels per day, but consumes over twenty million barrels, making it a net importer of the energy commodity. The international oil cartel’s output has been the critical factor for prices, as OPEC+ retained its pricing power over the past years. U.S. energy policy is about to dramatically change if the incoming administration keeps the President’s campaign pledge to pump up U.S. fossil fuel production to unprecedented levels. In his acceptance speech, he clearly said, “Promises made, promises kept.”
The U.S. election and China are the most significant factors for the oil market
The U.S. election is the critical factor in determining crude oil prices’ path of least resistance. In my Q3 energy report on Barchart, I wrote, “Crude oil and biofuel are on the ballot early November election in the U.S. U.S. oil policy could determine if oil and oil product prices head higher or lower based on climate change versus energy independence policies.”
I believed that a Harris presidency would have kept oil prices stable to higher, while a second term for former President Trump would cause prices to decline, perhaps appreciably. I expect nearby NYMEX crude oil prices to head back toward the $40 per barrel level.
Meanwhile, China is another significant factor for oil prices as it is the world’s leading commodity consumer and one of the two most populous countries. In September, the Chinese government rolled out stimulus by cutting interest rates and reducing bank reserve requirements to boost the economy and reach the government’s 5% target growth rate. An improvement in Chinese economic conditions could increase crude oil demand, slowing the energy commodity’s descent.
Seasonality is a factor in the crude oil arena. Prices tend to decline during winter as gasoline demand falls, but the election results will likely “trump,” no pun intended, all technical and fundamental factors for the crude oil market.
Expect lots of volatility- UCO and SCO are leveraged trading tools that can enhance results
Bullish and bearish factors had pulled crude oil prices in opposite directions as the price of nearby NYMEX futures continue to staddle the $70 per barrel level. Trading crude oil in the current volatile environment could be optimal until a definitive trend develops.
The most direct route for a risk position in the WTI crude oil market is the futures and futures options trading on the CME’s NYMEX division. Futures involve margin, which creates significant leverage.
The USO ETF is a liquid product that tracks NYMEX WTI crude oil futures on the up and downsides. At $73.00 per share, USO had nearly $1.495 billion in assets under management. USO trades an average of over 3.79 million shares daily and charges a 0.81% management fee. While USO is an unleveraged ETF, the volatility of month-to-month spreads creates issues for long-term investors using USO to track oil prices, making the ETF a medium-term tool.
From a short-term perspective, the UCO and SCO ETFs provide double leverage to the USO ETF and nearby crude oil prices on the up and downside, respectively. At $26.60 per share, UCO had over $640 million in assets under management. UCO trades an average of over 3.12 million shares daily and charges a 0.95% management fee. At $17.73 per share, SCO had over $104.45 million in assets under management. SCO trades an average of nearly 1.25 million shares daily and charges the same 0.95% management fee. UCO and SCO are only appropriate for short-term trading purposes as they experience time decay when the oil price is stable or moves contrary to expectations.
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 long position in SCO if stopped out in the current political and financial environment.
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.
