Analyst: 'Serious energy downturn' coming whether Trump or Harris wins

In their bid to win re-election in 2024, former President Donald Trump has promised to “drill, baby, drill” to lower energy prices, while Vice President Kamala Harris has said she will not ban fracking.

But those promises may not matter much in the short term. Energy prices are set to fall, regardless of who wins the election, says one industry watcher.

“Whoever gets elected in November will be very fortunate to be dealing with some of the most severe energy downturns … since 2020,” Tom Kloza, head of energy analysis at Opus Global, told Yahoo Finance, referring to the start of pandemic-driven lockdowns four years ago when U.S. crude prices plunged as travel demand collapsed.

Last week was one of the most volatile in energy markets this year, with oil hitting its lowest level since 2021 before rallying on Wednesday. Year-to-date, WTI (CL=F) is down about 2%, while Brent (BZ=F), the international benchmark, is down more than 4%.

Gasoline prices also fell to their lowest level since February, with the national average at $3.24 a gallon, according to AAA.

Prices are expected to fall as the industry soon switches to cheaper winter gasoline. Analysts expect the national average price to fall below $3 a gallon in the coming weeks barring an unexpected event.

“Oil prices below $3 will certainly boost consumer sentiment heading into the fall,” Patrick De Haan, head of oil analysis at GasBuddy, told Yahoo Finance.

Weak demand from China, the world’s largest oil importer, has been the main driver of lower crude prices. The country has been grappling with a housing crisis while shifting toward electric vehicles and more natural gas consumption.

Cracks in the US and European economies have also affected markets, noticeably scaring away some speculators.

“What happened this summer and is still happening is that we are no longer seeing speculators buying futures and options,” Kloza says. “The fact that we are not seeing more speculative money coming into the market … could be a real big change in the oil market.”

“Right now, financial participation in oil markets is probably as low as it has been since oil became an asset class,” Kloza said.

The fall in oil prices has been so rapid that Wall Street analysts have been forced to lower their forecasts. On Monday, Morgan Stanley cut its price target for Brent crude for the second time in weeks, citing the risk of “significantly weaker demand.”

Analysts expect Brent crude to average $75 a barrel in the fourth quarter of this year, down $5 from the previous downwardly revised forecast of $80 issued in late August.

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Oil demand growth forecasts have also been cut. The International Energy Agency cut its forecast for 2024, noting that Chinese oil demand is “experiencing a sharp contraction.”

The revision came in the same week that OPEC slightly lowered its oil demand forecast. Despite the revision, OPEC’s forecast is still close to double other industry estimates.

The Saudi-led oil alliance has been keen to restore more of its supplies by easing some of the production cuts, which have helped keep prices at a floor.

But the cartel recently postponed the reintroduction of barrels that had been scheduled for October due to the drop in oil prices. This postponement was not enough to boost prices.

“OPEC+ still has a lot of oil waiting to come back into the market,” Rob Thamel, portfolio manager at Tortoise, told Yahoo Finance on Wednesday. “And I think that’s the concern — is there really enough demand to meet and absorb this increased oil that’s coming back into the market anytime soon?”

In a nod to the centrists, Harris highlighted record production in the United States, the world's largest oil and gas producer, during Tuesday's event.

“We have invested $1 trillion in the clean energy economy and have also increased domestic gas production to historic levels,” Harris said.

Meanwhile, Trump has promised at rallies to produce more oil in order to cut energy prices in half and bring gasoline prices below $2 a gallon, though analysts expect producers to keep his promise to “drill, son, drill” if prices fall too low.

On average, companies need U.S. crude to be at least $64 a barrel to drill a new well profitably, and $39 for an existing well. According to a Federal Reserve Bank of Dallas survey.

With WTI crude trading near $69, production is expected to continue to grow amid technological breakthroughs. The U.S. reached peak production last year despite a decline in U.S. drilling activity as new wells are more efficient, according to Government data. U.S. oil production is expected to hit another record high next year, thanks to advances in horizontal drilling and hydraulic fracturing.

“The Ukraine war, the Covid-19 lockdowns, those are the things that have shaped oil prices in the last four years,” said Kloza of Opis.

“It is more likely that we will see more modest prices next year, and we will see oil trading in [on] a lot “We are now living in calmer conditions than we have been in the past three years,” he added.

Ines Ferry is a senior business reporter at Yahoo Finance. You can follow her on X on @ines_ferre.

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