A New President's Potential Impact on Oil Prices

9月17日

1. Introduction

The U.S. presidential election in 2024 is set to bring new leadership, with a new president guaranteed to take office. As history has shown, political transitions often have a profound effect on financial markets, and crude oil is no exception. Traders, investors and hedgers are now asking the critical question: how will WTI Crude Oil futures react to this change in leadership?

While there is much speculation about how a Democrat versus a Republican might shape oil policy, data-driven insights provide a more concrete outlook. Using a machine learning model based on key U.S. economic indicators, we’ve identified potential movements in crude oil prices, spanning short, medium, and long-term timeframes.

2. Key Machine Learning Predictions for Crude Oil Prices



Short-Term (1 Week to 1 Month):

• Based on the machine learning model, the immediate market reaction within the first week following the election is expected to be minimal, with predicted price changes below 2% for both a Republican and Democratic win. The one-month outlook also suggests additional opportunity.
  

Medium-Term (1 Quarter to 1 Year):

• The model shows a significant divergence in crude oil prices over the medium term, with a potential sharp upward movement one year after the election. Regardless of which party claims the presidency, WTI crude oil prices could potentially rise by over 40%. This is in line with historical trends where significant price shifts occurred one year post-election, driven by economic recovery, fiscal policies, and broader market sentiment.
  

Long-Term (4 Years):

• Over the course of the full four-year presidential term, the model predicts more moderate growth, averaging around 15%. The data suggests that, while short-term market movements may seem reactive, the long-term outlook is more balanced and less influenced by the winning party. Instead, economic conditions, such as interest rates and industrial activity, will have a more sustained impact on crude oil prices.
  

3. Feature Importance: The Drivers Behind Crude Oil Price Movements

The machine learning model's analysis highlights that crude oil price movements, especially one year after the election, are primarily driven by economic indicators, rather than the political party in power. Below are the top features influencing crude oil prices:

Top Economic Indicators Influencing Crude Oil:

• Fed Funds Rate: The most significant driver of crude oil prices, as interest rate policies affect everything from borrowing costs to overall economic growth. Changes in the Fed Funds Rate can signal shifts in economic activity that directly impact oil demand apart from the US Dollar itself.
  
• Labor Force Participation Rate: A critical indicator of economic health, a higher participation rate suggests a stronger labor market, which supports increased industrial activity and energy consumption, including crude oil.
  
• Producer Price Index (PPI): The PPI reflects inflation at the producer level, impacting the cost of goods and services, including oil-related industries.
  
• Consumer Sentiment Index: A measure of the general public's outlook on the economy, which indirectly influences energy demand as consumer confidence affects spending patterns.
  
• Unit Labor Costs: An increase in labor costs can signal inflationary pressures, which could lead to changes in oil prices as businesses pass on higher costs to consumers.
  

This study exclusively uses U.S. economic data, excluding oil-related fundamentals such as OPEC+ supply and demand information, in order to focus on the election’s direct impact through domestic economic channels.

Minimal Influence of Political Party on Price Movements:

Interestingly, the machine learning model suggests that the political party of the newly elected president has a relatively low impact on crude oil prices. The performance of WTI crude oil appears to be more closely tied to macroeconomic factors, such as employment data and inflation, than the specific party in power.

These findings emphasize the importance of focusing on economic fundamentals when analyzing crude oil price movements for longer term exposures, rather than solely relying on political outcomes.



4. Historical Analysis of Crude Oil Price Reactions to U.S. Elections

Looking back over the last two decades, the performance of crude oil post-election has varied, depending on global conditions and the economic policies of the newly elected president.

Notable Historical Movements:

• George W. Bush (Republican): In his 2000 election, crude oil dropped nearly 50% within a year, reflecting the broader economic fallout from the bursting of the dot-com bubble and the events of 9/11. In contrast, his 2004 re-election saw oil prices climb 21.5% within a year, driven by the Iraq War and increasing global demand for energy.
  
• Barack Obama (Democratic): After his 2008 election, crude oil prices surged by 33.8% within one year, partly due to economic recovery efforts following the global financial crisis. His 2012 re-election saw more modest growth, with an 8.3% rise over the same period.
  
• Donald Trump (Republican): His election in 2016 coincided with a moderate 23.8% increase in crude oil prices over one year, as the U.S. ramped up energy production through fracking, contributing to global supply increases.
  
• Joe Biden (Democratic): Most recently, crude oil prices skyrocketed by over 100% in the year following Biden’s 2020 victory, driven by post-pandemic economic recovery and supply chain disruptions that affected global energy markets.
  

5. WTI Crude Oil Contracts: CL and MCL Explained

When trading crude oil futures, the two most popular contracts offered by the CME Group are WTI Crude Oil Futures (CL) and Micro WTI Crude Oil Futures (MCL). Both contracts offer traders a way to speculate or hedge on the price movements of crude oil, but they differ in size, margin requirements, and ideal use cases.

WTI Crude Oil Futures (CL):

• Price Fluctuations: The contract moves in increments of $0.01 per barrel, meaning a $10 change for one contract.
  
• Margin Requirements: As of recent estimates, the margin requirement for trading a CL contract is around $6,000, though this can fluctuate depending on market volatility.
  

Micro WTI Crude Oil Futures (MCL):

• Price Fluctuations: 10 times less. The contract moves in increments of $0.01 per barrel, meaning a $1 change for one contract.
  
• Margin Requirements: 10 times less, around $600 per contract.
  

Practical Application:

During periods of heightened market volatility—such as the lead-up to and aftermath of a U.S. presidential election—traders can use both CL and MCL contracts to navigate expected price fluctuations. Larger traders might use CL to hedge against or capitalize on significant price movements, while retail traders may prefer MCL for smaller, controlled exposure.

6. Conclusion

As the 2024 U.S. presidential election approaches, crude oil traders are watching closely for market signals. While political outcomes can cause short-term volatility, the machine learning model’s predictions emphasize that broader economic factors will drive crude oil prices more significantly over the medium and long term.

Whether a Democrat or Republican wins, crude oil prices are expected to see a potential increase, particularly one year after the election. This surge, driven by factors such as interest rates, labor market health, and inflation, suggests that traders should focus on these economic indicators rather than placing too much weight on which party claims the presidency.

7. Risk Management Reminder

Navigating market volatility, especially during a presidential election period, requires careful risk management. Crude oil traders, whether trading standard WTI Crude Oil futures (CL) or Micro WTI Crude Oil futures (MCL), should be mindful of the following strategies to mitigate potential risks:

Use of Stop-Loss Orders:

• Setting predefined exit points, traders can avoid significant drawdowns if the market moves against their position.
  

Leverage and Margin Control:

• Overexposure can lead to margin calls and forced liquidation of positions in volatile markets.
  

Position Sizing:

• Adjusting position sizes according to risk tolerance is vital especially during uncertain periods like elections.
  

Hedging Strategies:

• Traders might consider hedging their crude oil positions with other instruments, such as options or spreads, to protect against unexpected market moves.
  

Monitoring Economic Indicators:

• Keeping a close watch on key U.S. economic data can provide valuable clues to future crude oil futures price movements.
  

By using these risk management tools effectively, traders can better navigate the expected volatility surrounding the 2024 U.S. election and protect themselves from significant market swings.

When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: tradingview.com/cme/ - This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.

General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.