The oil and gas industry is inherently tied to geopolitical events and domestic policy shifts, and the current combination of rising U.S. rig counts, election-year dynamics, and global tensions is setting the stage for potential volatility in oil prices through 2025. A combination of political uncertainty in the U.S., fluctuations in global oil supply, and rising rig activity indicates that the first two quarters of 2025 may see heightened turbulence in crude oil markets.
Rig Count Surge: A Harbinger of Increased Supply
As of mid-September 2024, the U.S. rig count saw its largest weekly increase in over a year. According to Baker Hughes, the total rig count rose by eight, bringing the U.S. tally to 590, marking a significant uptick in domestic oil and gas production potential. Notable gains in key basins, such as the Niobrara, Gulf of Mexico, and Eagle Ford, indicate that companies are increasing drilling efforts after months of stagnation.
While rig counts are only a leading indicator of future production, the increase suggests that operators are responding to rising demand and expectations of higher prices as 2024 closes out. It also signals a belief that political or economic conditions in 2025 might favor higher outputs. Increased drilling can translate into a higher supply of oil, which traditionally exerts downward pressure on prices. However, rising supply alone doesn’t tell the whole story—geopolitical and economic factors may counteract this effect.
Election Year Volatility: Domestic Policies and Oil Markets
The upcoming U.S. presidential election in November 2024 could be one of the most significant political events shaping oil prices in the coming year. The policy differences between the two leading candidates—Vice President Harris and former President Trump—could not be more pronounced when it comes to energy production and regulation.
A second Trump administration would likely prioritize expanding U.S. fossil fuel production by reducing regulatory barriers and tapping into domestic reserves. This would mean more drilling, a ramp-up in fracking, and fewer restrictions on offshore projects. In such a scenario, oil prices could potentially face downward pressure in 2025 as the market is flooded with new supply.
On the other hand, if Vice President Harris secures the presidency, her administration would likely continue the Biden administration’s focus on the energy transition. This could involve stricter regulations on drilling, particularly in sensitive environmental areas, and greater support for renewable energy. Such policies would tighten the supply of domestic oil, possibly leading to price hikes. Additionally, political instability in the Middle East and the continued conflict between Iran and its regional adversaries remain wildcards in the oil price equation. Any further escalation could disrupt global supply chains and drive prices upward, particularly if vital shipping lanes like the Strait of Hormuz are compromised.
The Global Supply Picture: OPEC+ and Production Cuts
While domestic policy changes will affect U.S. production, global supply dynamics—particularly those orchestrated by OPEC+—will play a critical role in determining price trends through 2025. In recent years, OPEC+ has strategically cut production to maintain higher oil prices, despite growing U.S. output. As U.S. rig counts rise, these production cuts are likely to be extended or even deepened to prevent a supply glut.
The challenge for OPEC+ will be balancing market share with price stabilization. Should U.S. production flood the market, OPEC+ may struggle to maintain current price levels without drastic reductions in output. Given the intricate nature of the global oil market, any slight miscalculation by OPEC+ could lead to either a price collapse or a supply shortage, depending on the pace of U.S. production increases.
Gasoline Prices and Consumer Sentiment
The potential for volatility extends beyond crude oil to the refined products market, particularly gasoline. Gasoline prices remain a crucial point of contention in U.S. elections, and sudden price hikes at the pump could sway voter sentiment. A study from Stanford University showed that a 10-cent increase in gasoline prices can lead to a 0.60% drop in presidential approval ratings. Therefore, as the election approaches, both candidates may take steps to influence energy prices, such as releases from the Strategic Petroleum Reserve (SPR) or temporary regulatory relief for refineries.
For early 2025, the implications are clear. A Harris administration would likely result in tighter domestic supply, leading to higher prices at the pump, while a Trump administration would aim for policies that keep gasoline affordable through increased supply. Both scenarios introduce volatility, with higher prices more likely under a Democratic administration and supply-driven downward pressure more probable under a Republican one.
Conclusion: A Volatile 2025 for Oil Prices
The confluence of rising U.S. rig counts, election-year political uncertainty, and ongoing geopolitical tensions suggests that oil prices could swing widely in Q1 and Q2 of 2025. While increased drilling activity could stabilize prices by boosting supply, political and international factors may offset these effects, leading to heightened market volatility.
As the world watches the outcome of the U.S. election and its ramifications for energy policy, oil traders should brace for a turbulent start to 2025. The stakes are high, not just for the candidates, but for the global energy market as a whole.
