The Politics Of Oil

Written by Brad Zigler

Oil traders are looking ahead to two upcoming events. On Friday, November heating oil and gasoline futures go off the boards. And Tuesday, of course, is Election Day. The outcome for Friday is a certainty; Tuesday, not so much.

Last Trading Day forces the hands of oil traders who came into the day with better than 21,000 contracts open in the expiring product futures. Most of that will be settled by offset, so expect a pop today that'll likely add a third to the volume seen yesterday and will certainly add to volatility.

The election business isn't nearly as predictable. There's uncertainty that goes beyond mere head scratching over the probable victor. Traders are also looking ahead to the victor's energy policy. The murkiness in campaign platforms has forced many to look back at recent elections for clues. Does it matter if a Republican or a Democrat is elected?

Lately? Nope, not much. At least not in the short term.

The last five election cycles have been characterized by a fair degree of volatility in crude oil prices between the time the campaigns begin in earnest and the arrival of moving vans at 1600 Pennsylvania Avenue.

Crude prices are especially volatile between Election and Inauguration Days. By and large, though, oil prices have ended higher for the entire cycle in four of the last five elections.

Spot Crude Oil Price (WTI At Cushing, OK)

Election Year	Winner	January to Election Day	Election Day To Inauguration	Election Cycle
1988	Bush 41	-22.5%	36.8%	6.1%
1992	Clinton	5.6%	-9.6%	-4.5%
1996	Clinton	14.7%	10.3%	26.6%
2000	Bush 43	28.8%	-2.2%	26.0%
2004	Bush 43	51.0%	-7.6%	39.5%

So, should you rush out to buy the crude futures or oil ETFs like the United States Oil Fund (AMEX: USO) or the PowerShares DB Oil Fund (AMEX: DBO)? Well, from the looks of past performance, no, not now. There's been a lot of choppiness between Election Day and Inauguration Day, regardless of the victor's political affiliation.

Better to keep an eye on market fundamentals. OPEC last week announced a 1.5-million-barrel-per-day [BPD] production cut to shore up the collapsing crude market. The question in trader's minds, however, is whether OPEC member states will actually fall into line and adhere to these cuts. OPEC members have cheated in the past. And there will be plenty of pressure on oil ministries to squeeze dollars out of the market to keep social programs afloat.

Demand for gasoline within our borders continues to fall (see "Falling Oil = Rising Refining Margins"), keeping a wet blanket on prices.

Oil's technically very weak now. It'll take a heck of a lot of work just to reach its 50-day moving average, just below $95. NYMEX spot has defended the $60 level so far, but there's a growing interest in lower-struck December oil puts, even down to the $50 level. Fresh hedge selling ought to be expected if spot dips below $60.

NYMEX Spot Crude Oil

Comments

[E Thomas St.:]

I'm no big city blogger but c'mon, this has got to be the most ridiculous analysis ever. In every single circumstance macroenomic factors can be seen to obviously hold more sway than election events did. This is like tying Superbowls conference victories to oil prices.

2008 Oct 30 10:55 PM

[Doc 224899:]

The true politics of oil: funding the global jihad.

If Obama wins, OPEC will wield "the oil weapon" with even greater impunity. They've already used it to destablize markets throughout the non-Muslim world while simultaneously using our dollars to finance their war against us.

If you aren't familiar with the concept of "the oil weapon", as applied since 1973 by Muslim oil-producing states in their global jihad, then go do some homework.

2008 Oct 31 09:14 AM

[Managing Ed...:]

Street -

Precisely the point if you read the column below the graph ("Better to keep an eye on market fundamentals" et seq.).

As you can see from the remarks made by User 224899, there' are folks who believe the occupant of the White House somehow determines the course of oil prices.

There may, in fact, be better correlation between Superbowl wins and oil price trajectories. I haven't run those numbers.

2008 Oct 31 10:54 AM