The oil market has been remarkably stable over the past 3 months. Brent has generally stayed below $46 and above $40 while WTI has largely remained between $37 and $43.
Oil prices appear to be in a holding pattern, as traders wait to see what will happen. Here are three new points to consider:
1. Bullish EIA Data Failed To Lift Prices
Yesterday, the EIA released its storage and production data for the last week in August in the U.S. On the surface, these numbers should have been very bullish for oil with just over 9 million barrels of crude oil withdrawn from storage and draws for gasoline and distillate (for diesel). In addition, U.S. oil production slipped below 10 million bpd to just 9.7 million bpd.
However, most traders were aware that these numbers were impacted by temporary offshore oil platform and refinery closures due to Hurricane Laura which hit the main oil regions of the coast around the Gulf of Mexico last week. As a result, the price of WTI did not rise.
It is likely that the data released next week (which will measure the current week’s production and usage) will continue to show the effects of Hurricane Laura, as many refineries and offshore oil platforms are still in the process of restarting. The fact that WTI moved down on Wednesday despite very bullish numbers from the EIA reveals that traders are prioritizing longer-term demand weaknesses in crude oil and potential supply increases as opposed to short-term positives.
2. Fewer U.S. Commuters, Limited Air Travel
News about motorists and airlines in the United States is fueling some of these concerns over weak demand. A survey of drivers from ValuePenguin revealed that 3 out of 10 people in the United States who own a car report that they are no longer commuting, either because they lost their jobs or because they are working from home.
The number of drivers who purchased gasoline weekly in the United States dropped by 26% in August compared to January and February of 2020, revealing that although U.S. gasoline demand rose significantly over the summer from its spring levels, we cannot expect to retain this jump unless many more offices return to in-person work, more schools re-open and the economy improves. A good portion of the surge in demand this summer was due to summer vacationers—especially because so many travelers avoided air travel—and we can expect that to fall off now that summer is ending.
News from airlines reveals that air travel is not likely to pick up in the second half of 2020. This means that jet fuel demand will continue to be very weak. All of the major airlines in the U.S. have eliminated change fees for flights in the United States, meaning a passenger may make a purchase today but not use it for an indeterminate number of months—a sign that airlines are desperate for cash. Generally, businesses try to avoid these kinds of liabilities, however, airlines are willing to take on these unknown variables for many months in order to secure immediate cash.
United Airlines (NASDAQ:UAL) is also planning to cut 16,370 jobs and American Airlines (NASDAQ:AAL) will lay off 17,500 employees. There are many issues that continue to limit air travel, including travel quarantines in the U.S., international travel restrictions, mask mandates on planes and general fear of sitting in a confined space with strangers. There is no indication when air travel will rebound, and the airlines seem to be preparing for a long downturn.
3. OPEC Overproduction
Two OPEC producers have indicated changes to their oil output which could impact supply over the next few months, and Russia would like OPEC+ as a group to boost supply soon. The United Arab Emirates announced that it overproduced its quota in August by 103,000 bpd. According to the UAE’s oil minister, this was due to higher than expected domestic electricity demand, which meant the UAE had to produce more oil in order to produce more associated natural gas to burn in its own power plants. It appears that this extra oil went into storage rather than to exports, and the UAE claims it will slash more production during the autumn months to compensate for this over-production. However, future UAE cuts could be overshadowed by more output from Iraq.
The Iraqi oil minister announced that he plans to ask OPEC for special exemptions in 2021 because the country is experiencing a particularly difficult financial situation. According to the minister, Iraq needs to export more oil beyond its quota. He later clarified his comments to indicate that he would only ask OPEC to allow Iraq additional time to “make up” for its earlier over-production. Iraq has reduced exports from southern Iraq significantly over the past 2 months, but exports from the Kurdish autonomous region in the north have not been curtailed.
It seems that despite significant pressure, Iraq is simply unable to comply with its quota restrictions, both for financial reasons and because Baghdad lacks the authority and power to control what goes on in northern Iraq. This will continue to be a major issue for OPEC when the group’s technical committee meets in September and when the group convenes for its regular meeting in November/December. Iraq’s lack of compliance has frustrated OPEC’s attempts to lift oil prices over the last few years. In its current fiscal situation, Iraq cannot comply without dire consequences to the Iraqi people. Market watchers should expect that, barring involuntary curtailments, Iraq may never slash production enough to comply with these quotas.
Meanwhile, Alexander Novak, Russia’s oil minister, said that he believes oil demand is 90% recovered from the pandemic. He would like OPEC+ to react to this by increasing supply. He was not clear in his remarks when he will push for the group to increase production, but it is possible he is preparing to push for increased output as early as the Joint Ministerial Monitoring Committee (JMMC) meeting scheduled for September 17. This group can make recommendations to the entire OPEC+ group based on their technical assessments. Given that there are significant indicators of weakness in oil demand from the United States—which is the world’s largest oil consumer—plans to increase production could send oil prices cratering if OPEC+ isn’t careful.