As June arrives, here is a look at where oil prices stand going into the summer of 2017. The May 25, 2017 OPEC and joint non-OPEC meeting ended exactly as forecast. Producing countries agreed to extend the current limitations on production for an additional 9 months. In theory, this will continue the combined cuts of 1.8 million bpd through the end of March 2018.
In a surprise to many, including OPEC members, oil prices dropped throughout the daylong meeting, with U.S. crude eventually settling at $48.90, a 5% drop. It became clear that the market had hoped OPEC would make deeper cuts, and had already priced in these hopes, even though the group’s 9-month extension policy had been stated for some time. The market’s long bets overshot reality.
Now that OPEC has made its decision regarding supply, the question for the market is what demand will look like this summer. Below are three significant factors that could affect the oil market this summer.
Typically, demand for gasoline rises over the U.S. Memorial Day weekend. Excursions by car of 50 miles or more were expected to increase by 2.7%. Air travel is also expected to increase this summer. A significant increase in gasoline demand in the U.S. over the summer could result in drawdowns of U.S. crude stocks by as much as 10 million barrels per week (though more moderate estimates say 3-4 million barrels). U.S. refineries processed more crude oil in the two weeks leading up to Memorial Day this year than they had in the previous two years, indicating strong demand. If U.S. demand surprises the market with a record season this summer then oil prices rise again.
Typically, domestic crude oil use from Persian Gulf states (Saudi Arabia, Kuwait, UAE) rises significantly over the summer. This is because these states, unlike most other countries, burn crude oil for electricity. Electricity use increases dramatically over the summer in this part of the world as scorching summer temperatures send residents inside to turn up their air conditioners. In 2014, for example, Saudi Arabia burned almost 1 million barrels of oil per day in the month of July – up from the 600,000 bpd it usually burns for domestic use. Usually, Saudi Arabia increases oil production over the summer to meet its domestic demand while continuing to satisfy global demand. This year, with the OPEC deal in place, Saudi Arabia will not be able to increase production beyond its 10.058 million bpd quota (last July Saudi Arabia produced a record 10.67 million bpd).
Ramadan, the Muslim month of fasting, just began this week, so electricity use in the Gulf will be even higher this June. However, traders should not expect Saudi domestic demand for crude oil to rise this summer as much as in previous years. This is due to the expansion of the Wasit natural gas plant, which should replace approximately 100,000 bpd of crude oil usage with natural gas. Another natural gas plant is expected to open in 2019, accelerating Saudi Arabia’s shift towards natural gas usage.
Chinese oil demand has remained robust over the past two years. The Chinese have taken advantage of low oil prices to expand their petroleum reserves and have increased their storage capacity significantly. However, there are signs that Chinese oil imports may slow during the summer months. China imported a record amount of crude oil in March, but imports decreased by 9% in April. Refinery maintenance contributed to a stock build up in China that is threatening to continue over the summer months. The Chinese government has also taken steps to limit the amount of crude oil independent Chinese refiners can import to a combined 2 million bpd. China may very well limit its oil imports this summer in order to draw down its burgeoning oil stocks, which will look like slackening demand. This could counteract strong demand in the U.S. and Persian Gulf and put downward pressure on oil prices over the summer.
As the media focus on production numbers from OPEC, Russia, U.S. shale, and others, it is also vital to keep an eye on global demand.
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