3 Things To Watch In Oil Markets

As we hit the slow days of summer, here are three important issues that should be on every oil trader’s radar.

1. Yesterday’s OPEC+ Meeting

The OPEC+ group met virtually on Wednesday and, as I predicted last week, agreed to a very minor increase in production quotas for September--just 100,000 bpd. This will bring the total production limit for OPEC+ in September to 43.955 million bpd. However, it is unlikely that the market will see this amount of oil, because many producers cannot increase production. This increase is so negligible when compared with the total global oil supply of around 100 million bpd, that it is essentially nothing. This all seems to show how little respect Saudi Arabia has for the Biden administration, especially when considered in the context of President Biden’s visit and the administration’s subsequent announcement that the market would soon see “more steps” coming from Middle Eastern producers.

OPEC+ is essentially treading water, waiting to see whether a global recession bites into demand and sends oil prices tumbling, or whether western nations will implement their own sanctions on Russian oil. It is unlikely that OPEC+ will try to put together a new longer-term production deal until they have a better idea of how these factors will impact the market.

2. Nancy Pelosi’s Visit to Taiwan

The Speaker of the U.S. House of Representatives, Nancy Pelosi, visited Taiwan. She is the third most powerful person in the U.S. government. This visit is raising questions about how increased tensions between China and Taiwan would impact oil prices and the prices of other goods. An escalation of tensions between the region’s biggest power and the small nation would increase global oil prices.

First, if faced with the possibility of a military conflict, China would likely increase its foreign oil purchases. It is already the world’s largest oil importer.

Second, China could effectively control waterways in the region, including the most heavily trafficked maritime routes. China’s oil (and other products) generally flow through there, but so does the oil of other Asian countries like Korea and Japan. China could exert greater influence over the region during a military or diplomatic conflict. It would not be the first time that a regional military power has taken it upon itself to determine who can and cannot proceed through a waterway during a conflict. That would raise the price of oil.

3. Hurricane Season

This is the first week of August and the start of the height of hurricane season in the Atlantic. So far, Saharan dust and unfavorable atmospheric conditions have dampened the development of hurricanes in the Atlantic Ocean. Powerful hurricanes, especially in the Gulf of Mexico, can impact offshore and onshore oil production, petroleum imports and exports, petroleum refining, and the transportation of petroleum within the U.S. Traders should keep in mind that the U.S. government may be limited at this time in how it can respond to short-term and long-term outages, because it has already released a great deal of oil from the Strategic Petroleum Reserve to try to reduce gasoline prices before the November midterm elections. A powerful hurricane in the wrong place could cause a serious supply shortage in the U.S.