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Why Oil Prices Could Flatten (Or Even Slump) This Fall

By Ellen R. Wald, Ph.D.CommoditiesAug 20, 2020 05:07AM ET
www.investing.com/analysis/why-oil-prices-could-fall-200534660
Why Oil Prices Could Flatten (Or Even Slump) This Fall
By Ellen R. Wald, Ph.D.   |  Aug 20, 2020 05:07AM ET
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Evidence is mounting that oil prices may decline in the coming months. Whereas the common perception since March has been that we would see an uninterrupted—if slow—recovery, we are realizing that this may not be the case. Below is the case for why oil prices could fall:

Positive Demand Numbers, Little Impact Recently

Over the last couple of months, prices have remained fairly stable. For the most part, Brent has hovered a little below $46 per barrel, and WTI has been steady between $40 and $43 per barrel.

Crude Oil WTI Futures Daily Chart
Crude Oil WTI Futures Daily Chart

Positive news about demand has failed to raise prices over these ranges. Although oil stocks are still well above the five-year average, production and consumption are not as wildly out of sync as they were back in April and May, and yet oil prices remain stuck.

The good news for oil prices has been that over the past four weeks, the EIA has reported declines in the amount of stored oil. Still, oil prices have not risen and each week, these draws are becoming smaller.

U.S. oil stores declined by 10.6 million barrels the week ending July 24 and the week ending July 31, they dropped by 7.4 million barrels. The following week, U.S. oil stores decreased by 4.5 million barrels and in the week ending August 14, they fell by just 1.6 million barrels.

Now, if the oil draws shrink further or stop completely, prices could head lower.

Chinese Purchases Of U.S. Oil To Slow

U.S. crude oil exports to China have also received a boost recently, but this may change.

In August, U.S. crude oil exports to China hit a record high. Apparently, China has been motivated to ramp up purchases to show efforts to comply with its agreement to purchase $25.3 billion of U.S. fuel. Also, Saudi Arabia did not discount Arab Light oil for Asia nearly as much as purchases there hoped, making WTI a more attractive purchase for China. A similarly large volume of U.S. crude is loading up to head to China in September.

China ramped up its purchases of U.S. crude oil ahead of a planned review of the trade deal this August. However, because the price of oil is so low, there is basically no way for China to actually meet its dollar commitment for U.S. fuel purchases under the trade deal, so it is likely that once the review of the trade deal occurs, China will slow its purchases of U.S. oil. (That review was supposed to take place on August 15 but was postponed. No new date has been set and may even be postponed indefinitely as tensions between the two countries continue to escalate).

Also, China is experiencing a major backup of oil tankers seeking to unload oil at its ports. Part of the problem is that demand for oil products in Asia isn’t as strong as expected and Chinese refineries over purchased crude oil back in June when prices were cheaper. The planned opening of a new berth for unloading crude oil that was supposed to take place in August has been significantly delayed and is adding to the backlog.

The more oil China purchases from the U.S., the better the U.S. numbers look. U.S. numbers have an outsized influence on the price of oil because of the volume of U.S. production, the transparency in the U.S. market and the American-centered perspective of many traders. A reduction in these purchases would, therefore, have a negative impact on oil prices.

U.S. Demand Growth Could Ease

Demand for gasoline in the United States typically slows in September as the summer driving season ends, although travel was curtailed in the summer of 2020 due to the virus.

Gasoline Futures Weekly
Gasoline Futures Weekly

The rise in commuters this fall will be muted given that a sizable amount of the population is either out of work or working from home and many schools are not yet reopening. U.S. refineries typically go offline for periods in the fall to conduct regular maintenance and there is no indication that they are planning to delay this process. This will impact the weekly EIA data since refineries will be drawing less crude oil from storage and consuming less crude oil in general due to the maintenance.

Jet fuel demand is still low because of the virus, and it will remain depressed as work and leisure travel are still limited. Likewise, demand for diesel fuel has been flat throughout the summer and is likely to remain this way or get worse if the economy plunges further into recession.

The Bottom Line

In the United States—as well as in Australia, parts of Europe and elsewhere—the return to normal activity is being limited in part by fear. There is a debate to be had about how much a society should do to deal with its coronavirus issues. Sweden kept its economy open. Other parts of the world shut down almost entirely. But now we have to consider that even after the government responses end, the people may continue to be too fearful to return to normal immediately.

Franklin Templeton published a crucial study on this issue. We have said for months now, that the oil (and economic) recovery will come in three parts:

  1. Overcoming the virus and the government responses
  2. Overcoming the population’s fears, and
  3. Overcoming the residual economic damage.

The oil supply from OPEC and Russia is set to remain steady or increase slightly. Unless the U.S. sees a major uptick in industrial and economic activity or U.S. production contracts further, it is likely that oil demand will flatten or even decline as we head into the autumn and winter. In this case, prices seem poised to fall as we enter the end of the third quarter and head into the fourth quarter.

Another event that could put positive pressure on oil prices would be a victory—by former Vice President Joe Biden in the U.S. presidential election. Over the last few years, the U.S. has typically been the world’s largest producer of oil, but many of Biden’s political allies would like to see marked decreases in U.S. production, particularly from shale oil and offshore oil. A new, Democrat energy policy would raise the possibility of significantly less production.

Why Oil Prices Could Flatten (Or Even Slump) This Fall
 

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Why Oil Prices Could Flatten (Or Even Slump) This Fall

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Comments (10)
Uncle Richard Cranium PhD
Uncle Richard Cranium PhD Sep 09, 2020 10:26AM ET
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The pundits are telling you all about demand concerns and citing the dip from reports last week. What they aren't telling you is that refinery utilization was down ( 73% vs 83% prior week) due to the storms in the Gulf and therefore, seriously affects products supplied (implied demand). Prior to that, demand was steadily increasing. Watch and learn from this.
Smarterthan You
Smarterthan You Aug 21, 2020 5:35AM ET
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The last time this author published a similar bearish story about oil, it ran up very nicely. She is usually dead wrong, so please keep being bearish on oil!
GHanhman GHanhman
GHanhman GHanhman Aug 21, 2020 5:35AM ET
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😎
Ted Dirty
DirtyTed Aug 21, 2020 5:35AM ET
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I was thinking exactly the same...it was in mid 30s..and now is above 40...so probably we can expect above 50 in the autumn.
Meself Meself
Meself Meself Aug 21, 2020 5:35AM ET
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me too she has been a comtrarian indicator for years
Doc Friesen
Doc Friesen Aug 20, 2020 5:22PM ET
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Great summation of current and likely short term events. Thanks so much for making your knowledge freely available.
Rana R A Aziz
Rana R A Aziz Aug 20, 2020 2:11PM ET
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So Nice, Just Like your smile!
Dr Mark Hollands
Dr Mark Hollands Aug 20, 2020 1:00PM ET
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Covid cases which had an outcome: 16,195,062 Recovered/Discharged: 15,401,429 (95%) Deaths:    793,633 (5%) One would wonder  why economies over reacted.
Uncle Richard Cranium PhD
Uncle Richard Cranium PhD Aug 20, 2020 12:13PM ET
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Actual draws were 6.7m and 4.3m, respectively, in the last 2 reports due to SPR draws. Why is that not mentioned? And actually more in reduction with Y-o-Y of +1.6 m and -2.7 m at the same weekly report dates.
David Bennett
David Bennett Aug 20, 2020 9:02AM ET
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I agree, demand will be the driver the remainder of the year and the uncertainty of a possible 2nd wave of covid, plenty of reasons to keep the rigs on the ground.
demis ili
demis ili Aug 20, 2020 9:00AM ET
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headwinds ahead indeed. however sooner or later a vaccine will be made available and people will be more confident about holidays. Russia and Saudi Arabia seem to be on the same page on the cuts. the oil storage tanker market day rates are normalising slowly. Even Biden production cuts might be good for oil price as it will limit supply further.
Allen Drewe
Allen Drewe Aug 20, 2020 8:28AM ET
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Your whole China argument of increased WTI purchases ignores the fact that China hadnt been purchasing any at all prior to last month using covid as an excuse. They are playing catch up and not over purchasing. Balancing a debt isnt the same thing as over purchasing for the future. The trade deal is likely doomed but any new president will see China’s poor compliance as a definite bargaining chip in any new deal. Meaning China will definitely keep buying oil.Youre also ignoring the rising tensions in the middle east. Also demand was flat during summer we shouldnt see the demand drop off we notmally do because we never had a demand increase sue to covid. Summer essentially never even happened for oil demand.
JP JATTAN
JP JATTAN Aug 20, 2020 8:28AM ET
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Absolutely correct. Any untoward situation in middle east shall be only driving factor in surging oil prices. Why do we forget Sulemani death event in Dec last year, negating all forecasting & skyrocketing oil pricing overnight.
Joseph Ben
Joseph Ben Aug 20, 2020 6:14AM ET
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great read and thorough..geopolitics could cause a rise in prices though. Of course I'm talking Middle East
 
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