Oil Prices And Election Years: Sell Crude Going Into The New Year

Apr.17.12 | About: The United (USO)

With the upcoming 2012 election, there has been massive bullish speculation on stock prices based on the government supposedly stimulating the market to encourage reelection of the incumbent party. However, with the increased political scrutiny toward gas prices and the oil industry, a strong tie has developed between election years and the price of West Texas crude oil.

Oil Prices and Election Years Since 1992
Year: November Crude Price Peak Avg. Monthly Price Percent Change
1992 20.33 22.37 -9.10%
1996 23.81 24.9 -5.81%
2000 34.37 33.89 1.40%
2004 48.45 53.25 -10.90%
2008 57.29 133.93 -57%
2012 ???? 106.14 ????
Click to enlarge

As seen in the chart below, oil prices are highly negative correlated with election season. Outside of 1996, oil prices have fallen by over 5% from their peak monthly average every election in the past twenty years. The rate of this decline has considerably accelerated since the year 2000 when gas prices started becoming a political talking point.

Year: Change in December
1992 -6.27%
1996 7.45%
2000 -17.37%
2004 -10.77%
2008 -27.67%
2012 ????
Click to enlarge

Another interesting piece of data to note is what happens going into the new year after the election. Again with the exception of 1996, the monthly average of crude prices declined by an average of 15.22% the December following a presidential election.

Whether it is a secret release of the strategic petroleum reserve, the oil industry not wanting to rankle voters, or politically driven speculation, oil prices clearly react negatively to political pressure. So what does this trend mean for investors? I believe that due to the assistance of weakening European economies and a reduced threat of a war in Iran, this trend of falling oil prices heading into the November election will continue. 1996 was an anomaly because the economy was exceptionally strong due to a technology boom and oil prices were too cheap to be a real concern to voters. As a result, I recommend shorting oil (through either USO, DBO, or OIL) either now or after peak driving season in July, and holding the position until Christmas time as the December decline is often more significant than the price fall heading into November.

Disclosure: I am short DBO.