November’s Election Could Bring A Return To Oil Market Volatility

With a presidential election set for November, polls indicate there is about a 50/50 likelihood of a Donald Trump victory. That outcome would signal a return to some form of the “drill, baby, drill” days of 2017-2019, during which US oil and gas producers raised overall production by 2 million barrels of oil per day over one 12-month period. For the OPEC+ cartel, that raises the potential for a renewal of rapid US production growth that could further inhibit its ability to prop up oil prices at targeted levels.

Oil markets responded negatively to the status quo outcome to Sunday’s OPEC+ meeting, with prices for both the international Brent index and the domestic WTI index dropping more than 3% in Monday trading and adding another 1.5% in losses on Tuesday. Even though the cartel members preserved their across-the-board export reductions of 3.6 million barrels per day (bpd) and the voluntary cuts among Saudi Arabia, Russia and a few other members of an additional 2.2 million bpd, oil traders were obviously anxious to see even deeper cuts in light of heightening concerns about the condition of the global economy.

One decision reached by OPEC+ increased nervousness among traders, raising the possibility of the cartel elevating production levels later in the year. That agreement holds that the countries currently holding to the additional voluntary cuts can start gradually reintroducing their volumes onto the market beginning in Q4 2024. The fact that members agreed to make that provision conditional on various economic factors failed to provide comfort to jittery market participants.

OPEC+ controls a little over 40% of global crude supplies, but its ability to prop up crude prices grows increasingly difficult as the global economy slows. A slowing economy invariably means a corresponding reduction in the rate of demand growth for crude oil, and that, combined with rising production levels in frontier regions like Guyana and the western offshore of Africa, leaves cartel members little room to grow their own national production. The easing of US sanctions now enabling Iran and Venezuela to increase their own exports only adds to the difficulty.

Now, with an election looming in November, the potential returns for the US industry to re-engage in the role of global swing producer it occupied during the shale boom years of 2016-2019. Although US crude production growth appears to have leveled off across the first half of 2024, it has done so at record high levels, and only after cutting the active drilling rig count by 45% since December 2018, and by almost 20% over the last 12 months.