US Election:
Performance of oil in previous presidential elections

The importance of oil

Oil is one of the integral parts of the global economy, and oil prices are highly volatile. In the last five years alone, the West Texas Intermediate (WTI) benchmark has ranged from below $20 in April 2020 to over $110 in June 2022. The most important driver of oil prices is supply and demand, but political risk plays an important role, as does the overall performance of the world economy. When traders expect industrial demand to fall, oil prices drop, but growth and supply constraints can cause dramatic spikes in the price of the ‘black gold’.

Fracking has transformed the US from a major oil importer to an exporting nation, and political decisions have a big impact on global markets. This election is likely to have a major impact on short- and long-term price swings in the crude oil market.

“Changes in the US economy and general risk environment can overpower the influence of political risk on oil prices”

Oil and past elections: a complex pattern

The performance of oil in election years is complicated. Oil is a volatile industrial commodity, and prices are influenced by economic expectation and political risk as well as supply and demand. When we look at past elections, a complex pattern emerges. Immediately after Democrat victories, oil tends to sell off, recovering before the inauguration. After Republican victories, the reserve seems to be true, with initial gains followed by a correction. What’s more interesting is that re-elections show reduced volatility, and that the above pattern is stronger when a new president wins the White House. This raises questions: would a second Trump victory count as re-election? What about Harris replacing Biden, continuing Democratic control of the presidency? The 2024 election doesn’t fit easily into past categories. As always, patterns may have no predictive power, as changes in the US economy and general risk environment can overpower the influence of political risk on oil prices.

Bill Clinton: 1992 and 1996

Democrat Bill Clinton defeated Republican George Bush Senior in 1992 and Bob Dole in 1996, in two unusual elections marked by the strong showing of independent third candidate Ross Perot. Immediately after the 1992 result, oil began a downtrend that saw Brent crude losing 15% compared to the day before the election. Around the inauguration, the market reversed and began a strong rally, soothing market jitters about a new president and a return to a Democratic administration after 12 years of Republican presidents. Clinton’s re-election year of 1996, saw more stable markets, with a rally following his second victory. Over his entire presidency, Clinton saw the strongest performance in energy markets of recent US administrations.

George W Bush: 2000 and 2004

Clinton’s presidency was followed by two terms under Republican George W Bush (or ‘Bush Junior’). Seen as more pro-business and pro-oil than his predecessor, markets spiked after his victory in the contested 2000 election, with oil gaining $3 per barrel in the week following the election. However, as his inauguration drew closer, market worries set in, with the early 2000s the peak of America’s import-dominated period in the oil markets. This resulted in a mild sell-off and sideways trading markets. Bush’s later presidency, and re-election campaign in 2004, saw a sustained bull market and soaring oil prices.

Barack Obama: 2008 and 2012

Under Barack Obama, US oil production ended a downtrend that began in 1970, with the fracking of new deposits shifting oil production to new regions and turning the US into a significant producer once again. The US became a net exporter of refined petroleum products in 2011. However, until Trump’s presidency, the US remained a net exporter of crude oil, and the Democratic administration had a complicated relationship with an industry many in the party opposed on environmental grounds. Over Obama’s two terms, oil production increased by 80%, and prices, which had remained high after their low during the financial crisis, began to fall during the second half of 2014.

Trump and Biden: 2016 and 2020

Oil markets followed the familiar pattern of an immediate rally followed by a correction after Trump won the 2016 presidential election. Under Donald Trump, the US began exporting significant quantities of oil. Previous oil production in the US, notably in Texas, had been in a long decline and was mostly destined for the domestic market, but the explosion of new reserves using fracking transformed US oil production, and was encouraged by the Republican administration. In 2017, the US overtook Saudi Arabia and Russia to become the world’s largest oil producer, a status it has held every year to date. Oil prices remained volatile and lower-than-average during Trump’s term, but collapsed during the COVID pandemic and lockdown. Biden’s 2020 victory did not follow the Republican / Democrat pattern, as it took place just as prices recovered from their 2020 lows, and prices boomed from his election to inauguration, increasing by 15%. This bull market continued until 2022.

What happens next?

The long-term trend in US oil production is clear: a move away from energy dependence towards oil-exporter status. That seems likely to continue regardless of who wins the White House in 2024, though a Trump energy policy is likely to be more pro-oil than Kamala Harris’. Even so, oil markets are volatile, and either candidate could result in sell-offs or rallies as the market tries to judge their overall attitude toward the industry. If the pattern seen in past elections holds, a Democratic victory could see initial sell-offs, though any political moves in markets will likely be corrected as the realities of supply and demand set in.

More significantly, Kamala Harris and the Democrats have a stronger commitment to clean energy and non-oil fuel sources, which could impact the long-term demand for crude oil. That may be seen as an obvious negative for oil prices, but its impact would be complicated. For example, if restrictions on fracking reduce the output of the US oil industry, this is likely to increase global oil prices. The long-term trajectory involves many factors that are not impacted by this election: OPEC production caps, the status of Russia in the global economy, and technological development. Oil CFD traders should be ready for a volatile ride, whoever wins the next US presidential election.

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