Crude oil prices reached seasonal lows in mid-December 2023. Winter tends to be the weak season for petroleum demand as gasoline is the most ubiquitous oil product. Gasoline demand and prices decline during winter as drivers put fewer clicks on their odometers because of adverse driving conditions.
In March 2024, the peak driving season is on the horizon. Gasoline demand tends to peak during the late spring and summer. Meanwhile, many other factors support crude oil prices over the coming months. As of March 12, 2023, nearby April NYMEX crude oil futures at $78.16 per barrel were 14% higher than the mid-December 2023 $68.57 low. Nearby May Brent crude oil futures at $82.45 per barrel were 12.6% higher than the December 13 $73.20 per barrel low. The benchmark crude oil futures are trending higher, and the trend is always your best friend in markets across all asset classes.
Crude oil continues to power the world
- S. and European energy policy supports alternative and renewable fuels and inhibits the production and consumption of crude oil and fossil fuels.
- China and India, the world’s most populous countries, account for over one-third of the world’s population and are highly dependent on hydrocarbons.
- While gasoline-powered cars are losing market share to electric and hybrid vehicles, 84% of total U.S. passenger vehicles operated on gasoline in 2023.
- Gasoline is a crude oil product.
The bearish fundamental case for crude oil in March 2024
- Economic weakness in China has weighed on global crude oil demand.
- OPEC+ has cited weak Chinese demand as the reason for production cuts.
- S. crude oil production at over 13 million barrels per day remains near a historical high.
- Prices have declined considerably from the 2022 highs- Crude oil has made lower highs since trading at over $130 per barrel in March 2022.
The bullish fundamental case for petroleum prices
- OPEC+ recently extended production cuts through June 2024.
- The United States Department of Energy is replenishing the depleted Strategic Petroleum Reserve at the rate of 700,000 to 800,000 barrels per week. The SPR, at the 361 million barrel level in early March, remains far below the level in late 2021, which was over 600 million barrels.
- Seasonality favors higher crude oil prices as the 2024 driving season begins in the spring and runs through the summer when drivers put more mileage on their vehicles.
- Crude oil prices have made higher lows and higher highs since May 2023.
Direct ETF products that move higher and lower with the WTI and Brent benchmark prices
- The U.S. Oil Fund (USO) tracks NYMEX WTI crude oil futures, which are the pricing benchmark for approximately one-third of the world’s petroleum. WTI is the benchmark for North American crude oil.
- The U.S. Brent Oil ETF (BNO) tracks ICE Brent crude oil futures, which are the pricing benchmark for approximately two-thirds of the world’s petroleum. Brent is the benchmark for European, Russian, African, and Middle Eastern crude oil.
- The Bloomberg Ultra Crude Oil 2X ETF (UCO) is a leveraged product that magnifies the upside price action in WTI futures and the USO ETF product.
- The Bloomberg Ultrashort Crude Oil -2X ETF (SCO) is a leveraged product that magnifies the downside price action in WTI futures and the USO ETF product.
- Leverage involves additional risks as time decay erodes the value of bullish and bearish ETFs over time, making them only appropriate for short-term risk positions.
Oil-related ETFs that track petroleum prices
- Traditional energy ETF products holding energy-related companies tend to move higher and lower with crude oil prices.
- The S&P 500 Energy Sector SPDR (XLE) is a highly liquid ETF with a portfolio of the leading U.S. crude oil-related companies.
- The Vanguard Energy ETF product (VDE) owns shares in the leading U.S. crude oil and traditional energy-related companies.
- The VanEck Oil Services ETF (OIH) owns a portfolio of multinational companies that service the oil industry. OIH tends to correlate well with crude oil prices.
- The Direxion Energy Bull 2X ETF (ERX) is a leveraged product that magnifies the upside price action of energy-related companies.
- The Direxion Energy Bear -2X ETF (ERY) is a leveraged product that magnifies the downside price action of energy-related companies.
- ERX and ERY are only appropriate for short-term bullish or bearish risk positions in the energy sector.
While the odds favor higher crude oil and traditional energy prices over the coming months, the future remains cloudy as the November 2024 U.S. election will determine the path of U.S. energy policy. One of the choices voters will make is if they wish to continue to address climate change under the Biden administration or if a return to “drill-baby-drill” and “frack-baby-frack” to achieve energy independence under former President Trump is in the cards for the coming years. Expect volatility in crude oil prices as the election nears.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!