By Irina Slav
This year’s driving season was a disappointment for those who hoped and expected it to pull oil prices higher, helped by the pandemic that, those optimists reasoned, would motivate people to rely more heavily on personal transportation than public transit.
Yet prices have remained low throughout the summer despite a modest improvement. This week, the first week after the end of driving season, prices started with a loss, with WTI falling below $40 a barrel. The trend is likely to continue as pessimism prevails. Is that justified?
According to some, such as energy historian Ellen R. Wald, not really. Data from the EIA, Wald writes in an article for Forbes, suggests that the actual decline in gasoline demand, hence oil demand, from last summer to this was moderate, at less than 300,000 bpd. In itself, this decline could not be reason enough to keep U.S. oil prices as low as they are, not to mention going even lower.
Prices, however, are trending lower because gasoline demand in the United States is just one of many factors traders watch, and it has recently been overshadowed by others, notably expectations for future oil demand in some key markets. Recently, there has been cause to believe this future oil demand will not be as strong as many may have hoped.
Earlier this week, it emerged that Saudi Arabia had cut its official selling oil prices for buyers in Asia, the United States, and even Europe. This has been taken as a sign even OPEC’s number-one producer, one of the most upbeat producers when oil demand recovery was concerned, is not so sure it is recovering so well any longer.
China’s oil-buying spree has been showing signs of a slowdown even if imports continue to be higher than they were this time last year. This has led to fears China’s oil storage may be getting full, and these fears have been reflected in oil price movements. In all fairness, most news from China has been positive for prices, however, with oil imports continuing higher. The negative is in the uncertainty, equally strong for both the global economy and China’s specifically.
In more negative developments for prices, OPEC+ started easing its record production cuts last month, from 9.7 million bpd to 7.7 million bpd. Despite that fact, a few laggards were forced to effect additional cuts to compensate for their failure to stick to their production quotas for May, June, and July, the relaxation of the cuts has been bearish for oil prices.
The new flare-ups of Covid-19 in many parts of the world—including China—have not helped at all. Initial optimism about the return of oil demand hinged, perhaps unconsciously, on hopes for a stable and sustained recovery in normal economic activity after the spring lockdowns. This has not exactly panned out with many countries in Europe fearing a second wave of infections, and the U.S. still fighting high daily new infection numbers.
Amid all this, jet fuel demand is still in the gutter, with U.S. refiners struggling with excessive distillate fuel stockpiles. Expectations for the recovery of jet fuel demand are nowhere near as optimistic as they were about gasoline demand: it could take years for the air travel industry to recover, with pore-crisis levels seen no sooner than 2023. This, of course, is weighing on prices additionally.
Taking all these factors together, it is pretty easy to see why prices were trending lower at the start of the week. Indeed, they may well continue down: as energy industry commentator Osama Rizvi noted in an article for Oilprice.com, oil’s fundamentals do not justify higher prices at this point.