Where is the Energy Sector Heading in Q3 and Beyond?

The energy sector, including crude oil, oil products, natural gas, and ethanol swaps, posted an 8.78% gain in Q2 2024 and was 10.98% higher over the first six months of this year. While natural gas led the sector higher in Q2, gasoline edged out the gas as the leader over the first half of 2024. Crude oil, oil products, and ethanol posted double-digit percentage gains over the first six months of 2024. Crack spreads reflected seasonal factors, while coal for delivery in Rotterdam declined in the first two quarters. The XLE, a diversified oil company ETF, was lower in Q2 but increased over the first six months of this year.  

Crude Oil edged lower in Q2 but was higher over the first half of 2024

NYMEX WTI and ICE Brent North Sea crude oil futures, the two benchmark pricing mechanisms, declined 1.96% and 1.19%, respectively, in Q2 2024. NYMEX petroleum futures were 13.8% higher over the first half of 2024, and Brent oil futures rose 12.1% over the first six months of this year. 

The monthly chart highlights NYMEX oil futures ascent in Q2 and over the first half of 2024. The futures settled June at the $81.54 per barrel level and were only slightly higher in mid-July.  

August Brent futures settled at $86.41 per barrel at the end of Q2 and were slightly lower in mid-July. 

Crude oil has edged higher throughout the first half of this year, with the leading benchmark futures markets posting double-digit percentage gains. NYMEX and Brent crude oil futures were mostly steady in mid-July. 

Oil products reflect seasonal factors

Gasoline and heating oil are the two oil products traded on the CME’s NYMEX division futures market. Gasoline is the most ubiquitous oil product, fueling vehicles in the U.S. and worldwide, while heating oil is a distillate fuel and a proxy for diesel and jet fuels. 

Gasoline is a seasonal oil product that tends to rally during spring and summer. Heating oil’s characteristics as a distillate make it a year-round fuel, but it is more likely to reach highs during winter. 
In Q2, NYMEX gasoline futures bucked the seasonal factors, declining 8.05% but were 18.76% higher over the first half of 2024. Meanwhile, heating oil futures fell only 3.42% in Q2 and were 0.17% higher over the first six months of this year. Nearby gasoline futures settled at $2.5015, and the heating oil futures at $2.5331 per gallon wholesale at the end of Q2.

Gasoline and heating oil futures were only slightly lower from the Q2 closing prices in mid-July. 

Natural gas recovers, ethanol rallies despite weak grain prices

Natural gas is one of the most volatile commodities traded on futures exchanges. In 2023, NYMEX natural gas futures fell over 43.8%. Nearby natural gas futures traded to over $10 per MMBtu in August 2022 on the back of record-high European prices after Russia invaded Ukraine. The price plunged to a $1.522 per MMBtu low in February 2024. In Q2, natural gas recovered, rallying 47.53% but was only 3.46% higher over the first half of this year. 

The monthly chart highlights the wild price action in the U.S. natural gas futures arena.  Nearby futures settled Q2 at $2.601 per MMBtu and were significantly lower in early Q3. 

Ethanol is the biofuel that the U.S. government mandates blending with gasoline to reduce emissions. Since the U.S. is the world’s leading corn-producing and exporting country, corn is the ingredient in U.S. ethanol production. Chicago ethanol swaps moved 19.76% higher in Q2 and were 17.6% higher over the first half of 2024, closing Q2 at $1.97 per gallon. Nearby ethanol swaps were lower in early Q3. Ethanol rallied despite declines in corn and gasoline prices in Q2, increasing refining margins for biofuel-producing companies. 

Rotterdam coal bucks the trend with a loss- The XLE is higher in 2024

Coal for delivery in Rotterdam, the Netherlands, fell 8.72% in Q2 and was 3.88% lower over the first half of 2024. Rotterdam coal futures prices settled at $104.10 per ton at the end of June and were only slightly higher in mid-July. Rotterdam coal prices rose to a record $465 per ton high in March 2022 before plunging and reaching a bottom below the $100 per ton level in early 2024. The price has been consolidating around the $100 level throughout 2024. 

The S&P 500 Energy Sector Select SPDR (XLE) holds shares in the leading U.S. oil and gas-related companies. At around $93.45 per share, the XLE is the most liquid ETF in the energy sector, with over $38.52 billion in assets under management. 

The monthly chart shows the XLE falling 3.45% in Q2, closing Q2 at $91.15 per share. Over the first six months of 2024, the XLE rose 8.72% and has made higher lows and higher highs since the 2020 pandemic-inspired lows. Despite the Q2 decline, the XLE remained in a bullish trend and was higher in mid-July. 

The outlook for the second half of 2024 could depend on the U.S. election

The ongoing wars in Ukraine and the Middle East will impact the traditional energy sector over the second half of 2024. Any escalation could ignite substantial rallies as OPEC+ continues to dominate global pricing. The Chinese economy is critical for the path of least resistance of prices. If China emerges from its economic malaise, increasing energy demand would support higher prices. Meanwhile, the November U.S. election will determine energy policy over the coming years. The incumbent Democrats favor addressing climate change by supporting alternative and renewable fuels and inhibiting hydrocarbon production and consumption through a highly restrictive regulatory environment. 

The Republican challenges favor a “drill-baby-drill” and “frack-baby-frack” approach to tapping U.S. resources, establishing energy independence, and increasing revenues through exports. 

Based on their policy approaches, another four-year term for the incumbents will likely keep international energy prices elevated. A Republican victory could push prices lower to pre-pandemic and pre-inflation levels. The U.S. SPR at 373.7 million barrels remains over 43% below the June 2020 656 million barrel level. 

The bottom line is that we should expect volatility in the traditional energy commodities over the second half of 2024 as uncertainty over the U.S. policy path could cause significant price variance in the energy futures arena. With the potential for a second Trump administration rising, we could see lower oil prices over the coming years.

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