The summer season has begun. As usual, business slows as employees take vacations and the summer heat in the northern hemisphere stalls productivity. In the energy trading world, the U.S. has just returned from its national birthday on 4 July; Saudi Arabian businessmen are back from Eid, a holiday following the month of Ramadan; and much of the world is preparing for time off during the summer, especially during August.
It seems as though little happens in the markets during the summer months, but there are still issues for energy investors to keep in focus, even if they're sitting on the beach.
Venezuela currently reports its official production at 1.972 million bpd, but there are serious indicators that its oil company, PDVSA, will not be able to sustain even that level of production much longer. Venezuela’s economy is forecast to contract by 5.5% in 2017.
To date, oil speculators seem to have largely ignored the situation in Venezuela. If something major happens (sabotage or strikes, for example) it could cause a spike in global crude prices. Smart investors continue to watch for major news from Venezuela (especially the upcoming 30 July national assembly vote to rewrite the country's constitution), while wishing the best for the people of that country.
Summer is always the preeminent season for fuel usage. As the global oil market continues to struggle with a glut of oil and excess oil in storage, strong gasoline demand this summer would help lift crude oil prices.
In the United States, where people love to drive, a strong economy generally indicates that Americans will travel across the country by car for trips to family and tourist destinations. Americans currently have high hopes for the economy, so look for Americans to travel much this season and use more gasoline. Mexico is also increasing its gasoline imports after a fire damaged its primary crude oil refinery, so look for increased gasoline exports from the U.S. to Mexico, at least until the refinery is repaired.
In some parts of the world, such as the Middle East, oil is used for electricity generation, so consumption rises when the temperature does. This year Ramadan was in the hot month of June. The higher the temperatures are in July and August, the more oil will be used and the more oil will be produced in the Gulf region. However, it must be noted that Saudi Arabia, one of the largest consumers of crude oil for electricity generation, has been converting to natural gas for electricity and investors should not expect as large an increase in oil production or consumption as in previous years.
Central banks continue to meet over the summer, with the U.S. Federal Reserve holding its next meeting on 25 and 26 July. Rumors continue about the state of the U.S. economy and possibility of rate increases. The U.S. central bank is particularly important for energy trading, because the price at which oil is traded is generally pegged to the dollar. However, the energy markets’ connection to interest rate hikes can be counter-intuitive. See this piece for a more detailed explanation of this relationship.
Equity markets, particularly in Asia, Europe, and the U.S. may be a good indicator of slowing global productivity. While tech stocks have done well during the first half of 2017, the Wall Street Journal recently reported that tech-heavy exchanges in China and Israel suffered down trends in the first six months of 2017.
In recent weeks, the U.S. tech sector has seen increased volatility, and recent, disappointing IPOs for Snap (NYSE:SNAP) and Blue Apron (NYSE:APRN) have emboldened tech sector bears. Though Tech is not an energy-heavy sector, except in the powering and cooling of server farms, but a burst bubble in that sector could impact the global economy, including energy. Investors who focus on energy will want to keep abreast of volatility and rumors in these sectors as well.
Libya and Nigeria, two OPEC countries that recently suffered significant declines in oil production due to violence and political instability, are returning to the market. In Libya, oil output recently reached a four-year high; it is reportedly producing 1 million bpd. In Nigeria, oil output is expected to hit 2 million bpd in August. Neither country is subject to OPEC’s production cuts, so they could continue to expand production for the foreseeable future.
As the temperatures rise, tempers seem to flare. Watch for any unlikely but possible geopolitical conflicts.
In Asia, rhetoric between the U.S. government and the North Korean government is heating up. North Korea recently returned an American university student who had been imprisoned there for more than a year. The young man died just days after his return because of a brain injury suffered while in North Korea. The U.S. government is openly talking about ways to impede the North Korean government’s power.
Also in Asia, on 2 July the U.S. sailed a Navy destroyer within 12 miles of an island claimed by China in the South China Sea. China called this a, “serious provocation,” on top of other recent disagreements between the two powers. One dispute between the two countries is whether China should be allowed to grasp control of the world’s busiest shipping lanes. Military conflict between China and the U.S. is always extremely unlikely, because they rely on each other too much as trade partners. However, the appearance of tension is never good for the economic mood and sudden events can cause oil prices to spike.
A third major Asian hot spot is in Iraq, where ISIS seems to be faltering and the Kurds prepare for a September decision on whether to declare independence. If they do achieve independence, they will likely take with them 20% of Iraq’s oil reserves, in which case Kurdistan’s potential inclusion in OPEC could be a necessity for maintaining any control over the oil markets.
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