Crude Oil Prices in the Times of US Elections and a Cooling China’s Economy
Oil prices are a cornerstone of the global economy, and their dynamics often reflect broader geopolitical and economic shifts. The USA and China are two key players in the oil arena. In the run-up to the US elections, the volatility of crude oil prices frequently intensifies as market participants assess potential policy changes and their impact on supply and demand. Let’s explore the topic in today’s article.
Demand and supply
While supply and demand remain the primary drivers of oil prices, political risk, particularly during election seasons, plays a crucial role in shaping market expectations. The upcoming US elections are poised to influence both short- and long-term price swings, especially as the USA has transitioned into a major oil exporter due to the rise of fracking. As traders evaluate potential economic policies, oil prices may shift, driven by changes in industrial demand, supply constraints, and the broader risk environment.
However, the USA is not the only key player in this complex market. China, the leading country in global oil demand growth for decades, has also become a decisive player in oil price dynamics. Since the early 2000s, China’s rapid industrialization, infrastructure investments, and rising prosperity have fueled an insatiable appetite for oil. Over the past 10 years, the country has accounted for over 60% of the total global increase in oil demand, with consumption in China now 18% higher than pre-pandemic levels.
Yet, China’s demand is showing signs of contraction, with oil consumption falling by 1.7% year-on-year in mid-2024. A slowing economy, demographic challenges, and shifting investment patterns suggest that China’s once relentless growth in oil consumption may be losing momentum.
This evolving dynamic in China, combined with the US political uncertainty, sets the stage for significant volatility in global oil prices leading up to the US elections.
China’s struggle for economic growth
China’s economic growth over the past few decades has been driven primarily by investment, much of it financed through a state-dominated banking system. This investment-heavy model, particularly in the wake of the 2008 global financial crisis, has helped fuel rapid infrastructure development and industrial expansion. However, much of the capital has been funneled into state-owned enterprises, which often fail to generate strong returns, creating inefficiencies in resource allocation.
Currently, China is facing significant economic troubles. Its labor force is shrinking, and productivity growth has slowed. This is heavily supported by a rising youth unemployment rate, statistical data about which stopped being published by China’s statistical bureau in August 2023.
While the government has sought to rebalance the economy by shifting toward consumption-led growth and service industries, the path has been uneven. Private investment has declined as businesses grow wary of increasing risks, and rising tensions with the USA threaten China’s access to crucial foreign technology.
Moreover, the heavily indebted real estate sector, which has been a key pillar of growth, is now faltering. Over the past decade, unwise and greedy investments into real estate caused the creation of the biggest housing bubble the world has seen since the 2008 one in the U.S. In the last few years, it began to deflate very fast. Major developers, like Evergrande and Country Garden, announced a default on their debt obligations, as declining property prices didn’t allow them to cover expenditures. As a result, raising concerns about household wealth and local government finances take hold.
Although China’s debt is primarily domestically owned, systemic inefficiencies in how capital is distributed — combined with the government’s inconsistent market interventions — pose ongoing risks to future growth.
In the aftermath of a financial deathblow caused by the COVID pandemic, Chinese manufacturing and industrial production continues to lower, while its economy sinks into a deep crisis, which, if it continues to unwind, will inevitably lead to a lower oil demand growth in the future, impacting worldwide ‘black gold’ prices to the downside.
(Oil demand growth in China – IEA Oil Market Report (OMR) September 2024)
US elections and historical oil prices reaction
Oil prices hold significant importance in the USA due to the country’s deep-rooted car culture and reliance on personal vehicles. With sprawling suburbs, extensive highways, and limited public transportation infrastructure, many American cities have been designed to prioritize road travel, making driving a necessity for most citizens. This dependence on cars makes gasoline prices a major concern for everyday Americans, directly impacting their cost of living. For that reason, when election times come, oil prices closely monitor politics and react accordingly.
These reactions often follow a pattern influenced by the differing energy policies of Democrats and Republicans. Historically, oil markets tend to dip right after a Democratic victory, only to recover before the inauguration, while Republican wins typically lead to a short-term rally, followed by a correction. This dynamic stems from market perceptions of each party’s stance on the oil industry, with Republicans generally favoring pro-business, pro-oil policies, and Democrats leaning more toward environmental regulation and clean energy. A weaker and unclear response happens after re-election, where the influence of a sudden possible energy policy shift disappears.
If we take a look at a more long-term perspective on a 30-year span, before the 2008 financial crisis, oil prices lowered in the first half of the new presidential term and rallied in the second half. After the worldwide recovery, which happened during the first Obama administration, oil tends to first rise, and then fall in the second half of each term. The same happened during the Biden administration, as an unstoppable rally regained what oil prices lost during Covid.
Based on long-term observations, there is a consistent market rally leading up to the US elections (excluding the 2008 crisis).
Sadly, these dynamics have not much to do with US politics and depend more on supply and demand. It is a clear behavioral pattern for oil nonetheless.
(WTI weekly chart 16.09.2024 – TradingView)
2024 elections oil reaction forecast
In the upcoming 2024 election, the contrast between Democratic candidate Kamala Harris and former Republican President Donald Trump’s energy plans is striking. Harris is expected to continue President Biden’s focus on transitioning to clean energy, reducing fossil fuel reliance, and investing in green technologies. Such policies might initially pressure oil markets as traders anticipate tighter regulation and diminished future demand for oil.
On the other hand, Donald Trump, known for his support of the oil industry, has indicated that he would seek to boost domestic oil production through deregulation, focusing on energy independence and expanding US exports. A Trump victory could spark a rally in oil prices, driven by expectations of increased US production and relaxed environmental regulations, which would encourage more investment in fossil fuel infrastructure.
As the election approaches, oil markets are likely to react to the evolving political landscape, reflecting these distinct policy approaches. However, other global factors, such as economic performance and geopolitical risks, may also play significant roles in shaping oil price movements, complicating any clear election-related trends.
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