Crude Oil Jumps 9% Higher Following Positive Vaccine News

• The future for the world’s leading producer of crude oil

• Fracking and regulation over the coming years

• Price dynamics for crude oil in the post-COVOD-19 world

In March 2020, US crude oil output rose to a record 13.1 million barrels per day. At that level, the production was above Russian and Saudi Arabian daily output. The global pandemic crushed the demand side of the fundamental equation. US output fell, and OPEC, Russia, and other world producers announced an unprecedented output decline of almost ten million barrels per day.

For decades, US energy policy has strived for independence from reliance on Middle Eastern supplies. Over the past years, fewer regulations and support for US oil and gas production helped it become the world’s leader. The November 3 election was a referendum on the US’s future position in energy output. Democrats favored a move away from fossil fuels, while Republicans advocated for policies that would maintain the leadership role in oil production.

The voters spoke last week in the most contentious contest in years. The United States Crude Oil Fund (USO) and the United States Brent Oil Fund (BNO) follow the prices of the two benchmarks higher and lower. On Monday, November 2, one day before the election, the price of December NYMEX crude oil futures put in a bullish reversal trading pattern on the daily chart, which was a clue about which way the election would turn out. One week later, after the election, the price of crude oil exploded higher.

The future for the world’s leading producer of crude oil

The election results took a long time because the contest was close. Aside from razor-thin margins in swing states, the Electoral College contest was not settled by the end of last week. Joe Biden was only one state away from going over the top and President Trump in a position where he needed to run the table in Georgia, North Carolina, Pennsylvania, and Nevada to capture enough states for re-election. On Saturday, November 7, Joe Biden won the Presidency, but legal battles seem likely to continue. While Democrats will be in the White House in January, the Republican Senate majority depends on a pair of runoff elections in Georgia in January. Republicans picked up seats in the House of Representatives, but not enough to change the Democrat’s majority. The bottom line for the energy markets is that while there was no blue wave and sweep, the Georgia contests could determine the future of US energy policy.

Fracking and regulation over the coming years

A bipartisan agreement is necessary to create substantial changes in US energy policies if the Senate remains in the hands of Republicans. If Democrats take control, we significant change could occur. While a stricter regulatory environment is on the horizon, a ban or significant limits on fracking may be in the hands of Georgia voters.

President Biden will likely feel more pressure from his party’s progressive wing when it comes to the Green New Deal if Democrats win the Senate. As a former Senator, the new President knows that compromise is the only route to achieving legislation if the Republicans maintain a majority.

Meanwhile, Joe Biden won his party’s nomination as a moderate. Progressives will continue to attempt to push his administration to the left, but he will have to make a choice which could be a function of Georgia contests. Successful legislative initiatives will rely on Senate approval. When it comes to fracking and regulation, the Senate’s majority will determine regulatory changes over the next two years. As the Democrats lost seats in the House of Representatives, the 2022 midterm elections will become a significant issue during the coming years. Politically astute Democrats may not want to jeopardize their majority in the House by enacting legislation that causes substantial job losses in the energy sector. At the same time, a far stricter US regulatory environment threatens to hand the influence in the energy markets back to OPEC and the Russians. Voters could lay the blame for rising energy prices at the feet of Democrats if they are too aggressive when it comes to green legislation.

Price dynamics for crude oil in the post-COVOD-19 world

A blue wave that prompts the return of a strict regulatory environment could have caused significant changes in US oil and gas output. The political landscape now favors more rules and regulations.

The global pandemic continues to be the leading issue for oil and gas prices in the near term. On November 9, Pfizer (PFE) announced its vaccine is 90% effective. In the coronavirus’s aftermath, when the demand returns, the political risk of an aggressive green approach may not be worth the risk for the new President or moderate Democrats in the House and Senate. In the aftermath of the election, the price of natural gas fell from almost $3.40 to below the $2.90 per MMBtu level as of November 9.

Source: CQG

As the chart highlights, nearby December NYMEX crude oil futures rose from a low of $33.64 on November 2 to over $40 per barrel on November 9. The $40 level has been a pivot point for the energy commodity since June as bullish and bearish factors were pulling it in opposite directions. Lower worldwide production balanced lower demand because of the pandemic. The news of a vaccine caused the price of the energy commodity to explode higher.

Meanwhile, central bank liquidity and government stimulus are increasing the money supply, which is ultimately inflationary. Higher inflation is bullish for the price of oil and all commodities. The bearish trend in the US dollar, the benchmark pricing mechanism for crude oil, is also a bullish factor.

The bottom line is that the election results will not change the fundamentals for crude oil all that much. Inflationary pressures and a weak US currency are bullish factors that could remain long after the demand destruction because of coronavirus ends.

A majority for Democrats in the Senate could still cause dramatic shifts in US energy output. The thin margins in the election with the country divided could impact policy decisions. $40 remains the pivot point for nearby NYMEX futures. While the energy commodity has made lower highs and lower lows since August, seasonal factors during the winter months tend to lead to price weakness.

In the aftermath of the US election, and news of a vaccine on the horizon, the political dynamics for crude oil shift from the US supply-side back to the international landscape. The Middle East is home to over half the world’s reserves, which always threatens to cause volatility in the blink of an eye. Time will tell if a greener US energy policy hands the power base back to OPEC and Russia when it comes to prices.

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USO shares were trading at $28.34 per share on Monday afternoon, up $1.87 (+7.06%). Year-to-date, USO has declined -72.35%, versus a 13.69% rise in the benchmark S&P 500 index during the same period.

The United States Oil Fund (USO) was trading at $28.37 per share on Monday afternoon, up $1.90 (+7.18%). Year-to-date, USO has declined -72.32%, versus a 14.04% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #65 of 113 ETFs in the Commodity ETFs category.