But the election also will contribute to volatility that already is coming from other geopolitical and economic factors, Patton says, suggesting that long volatility strategies are a way to trade the election (see “Options Strategy”). “You can buy both a crude oil put and call in the hopes that you’re going to get a big upside move or a big downside move through the end of the year,” he says.
“Something is going to happen over the next three-and-a-half months, whether it be Israel attacking Iran, a Strategic Petroleum Reserve release or any number of things. There’s going to be more clarity on China, so the odds are good that you’ll have a significant move by year-end,” Patton says.
Chirichella says current oil market fundamentals still are biased to the well-supplied side as global demand is on the defensive. U.S. crude oil inventories still are hovering near the highest level since the early 1990s, while there is a deficit of refined products in the U.S. vs. last year and the five-year average.
“However, the U.S. is exporting about 1 million [barrels per day] (bpd) of distillate and about 500,000 bpd of gasoline,” he says. “I view exports as just another form of inventory that, if needed in the U.S., would be diverted to internal use.”
Chirichella notes that currently there is no shortage of oil anyplace in the world and there is a shortage of demand. “Global demand consistently has been declining as the global economy continues to slow. All of the projected oil demand growth is coming from the developing world with China playing a major part,” he says, adding, “The developing world, including China, also is slowing.”
Patton suggests that 10%-15% could be cut from crude oil prices if China slows more than the market expects. “Everyone is watching the data, but nobody really knows whether to trust the data because the Chinese have been known to manipulate their economic releases,” he says.
Zarembski says traders should be prepared for trading in a choppy market going into the election and beyond because the election looks to be very close. “Given the escalating uncertainty, both political and economic, that we are seeing going into the last half of 2012, I don’t see oil price volatility declining by any meaningful level.”
He adds, “It is interesting to see reports of slowing demand for oil and energy products, but prices are holding up extremely well given a recessionary environment in Europe and slowing growth in China and the U.S.”
However, Zarembski doesn’t expect this to last. “I don’t [expect] declining demand for energy will be a long-term trend.”
U.S. distillate inventories are at relatively low levels going into the fall and traders will need to watch how quickly refineries increase production to meet winter demand. “We were very fortunate to have had a mild winter last year and there are no guarantees that this will be the case this season,” Zarembski says.
“If we get a cold winter, expect to see a quick reduction in distillate exports with the product being diverted to the key heating oil markets along the east coast,” Chirichella says.
Zarembski adds that RBOB gasoline supplies also are beginning to tighten as refinery outages take their toll on supplies. “We would be in a much more dire situation if demand was not lackluster,” he says.
However, winter is a long way off and there will be an election before it comes. The current high price of energy may play a role in its outcome, even if is not what is driving the market today, and the geopolitical factors may prove to be a wild card in the election.
