Navigating the Shifting Energy Landscape: Insights for the 2024 Election

As the 2024 election approaches, the energy landscape has become a focal point for both former President Donald Trump and Vice President Kamala Harris. While Trump has promised to "drill, baby, drill" to lower energy prices, Harris has assured that she won't ban fracking. However, industry experts suggest that these promises may not hold much weight in the near term, as energy prices are poised to drop regardless of who wins the election.

Riding the Wave of Energy Deflation

A Fortuitous Shift for the Next Administration

According to Tom Kloza, the OPIS Global head of energy analysis, the next administration will be "very fortunate" in dealing with "some of the most serious energy deflation" since the start of the pandemic lockdowns in 2020. This period saw a significant slump in US crude prices as travel demand collapsed.The energy markets have experienced a volatile week, with oil touching its lowest level since 2021 before ticking higher on Wednesday. Year to date, West Texas Intermediate (CL=F) is down about 2%, while Brent (BZ=F), the international benchmark, is down more than 4%. Gasoline prices have also fallen to their lowest level since February, with the national average at .24 per gallon, according to AAA.

Factors Driving the Price Decline

The main driver of declining crude prices has been the weak demand out of China, the biggest importer of oil. The country has been battling a housing crisis while shifting toward electric vehicles and more natural gas consumption. Cracks in the US economy and Europe have also weighed on the markets, keeping some speculators notably at bay.According to Kloza, the financial participation in oil markets is "probably as low as it's been since oil became an asset class." This shift in market dynamics suggests a "real sea change for oil," as speculators are no longer actively buying futures and options contracts.

Revising Forecasts and Expectations

The rapid fall in oil prices has forced Wall Street analysts to revise their forecasts. Morgan Stanley, for instance, has cut its Brent price target for the second time in a matter of weeks, citing risks of "considerable demand weakness." The analysts now forecast Brent will average per barrel in the fourth quarter of this year, lower than their previous downwardly revised outlook of issued in late August.The International Energy Agency has also cut its outlook for 2024, citing Chinese oil demand "firmly in contraction." Similarly, the oil alliance OPEC has slightly trimmed its own oil demand forecast, though its expectations are still near double other industry estimates.

OPEC's Balancing Act

OPEC, led by Saudi Arabia, has been eager to bring back more of its supply by unwinding some of its production cuts, which have helped keep a floor on prices. However, the cartel recently delayed the reintroduction of barrels initially slated for October given the slump in oil. This postponement did not do much to boost prices, as the market remains concerned about the potential oversupply.According to Tortoise senior portfolio manager Rob Thummel, OPEC+ still has a "significant amount of oil that is just waiting to return to the market," and the concern is whether there is enough demand to absorb this increased supply.

The US Production Landscape

In a nod to centrists, during Tuesday's event, Vice President Harris underscored the record production in the US, the largest oil and gas producer in the world. Meanwhile, at rallies, former President Trump has promised to produce even more oil in order to cut energy prices in half and bring gasoline below per gallon.However, analysts expect producers to keep Trump's "drill, baby, drill" vow in check if prices go too low. On average, companies need the price of US crude to be at least per barrel in order to profitably drill a new well, and for existing ones, according to the Dallas Federal Reserve survey.Despite the declining US drilling activity, the US reached peak production last year due to technological breakthroughs, and US oil production next year is expected to reach another record level, given advances in horizontal drilling and fracking.

A Quieter Future for Oil Prices

According to OPIS's Kloza, the factors that have shaped oil prices in the last four years, such as the Ukraine war and the COVID lockdowns, are no longer the primary drivers. Instead, he believes that "we're going to see much more modest prices next year, and we'll see oil trade in [on] a lot quieter terms than we have for the last three years."As the 2024 election approaches, the energy landscape is undergoing a significant shift, with energy prices poised to drop regardless of the outcome. While the candidates' promises may grab headlines, the underlying market forces suggest a more muted and predictable future for oil prices, potentially providing a welcome respite for consumers and the economy.