End of Driving Season Means More Declines In Crude Oil Prices

Summer driving season: it’s the season to be traveling, what with long weekends, annual leaves and short getaways from the banalities of everyday life at the office. The summer season in the Northern Hemisphere is when demand for crude oil invariably picks up, because fuel consumption increases. In Europe, there’s greater hunger for diesel and in the U.S. there’s a pickup in gasoline demand. Usually.

This year’s driving season, however, is shaping up to be a very disappointing exception to the usual seasonal patterns in fuel demand. People are not traveling now as much as analysts expected back in May. Back then, the outlook was rosy, with some analysts forecasting an oil rebound to as much as $60 a barrel. Instead, we got WTI crude oil slipping into bear market.

The driving season ends next month, which is when most refineries shut down for maintenance after operating at near-full capacity during the summer months. This is—historically—when gasoline demand subsides. The end of summer travels is also when gasoline stockpiles in the U.S. could increase, further pushing down crude oil prices.

In the week ending 22 July, the EIA reported, gasoline production averaged 10.1 million barrels a day, more than in the previous week. Inventories of the most popular fuel also went up—by 500,000 barrels—after a 900,000-barrel buildup in the week ending 15 July. That buildup took the market by complete surprise—few seemed to have expected anything but a decline in fuel stockpiles in the very middle of driving season. Yet, they got the opposite.

It’s become a widely, though grudgingly, accepted truth that it’s impossible to predict what will happen in the crude oil market even in the nearest terms, what with all the supply disruptions that can happen here and there, and with the unpredictability of consumer behavior. However, looking at the most likely scenario for crude oil prices in September when refineries start shuttering operations for their regular maintenance, it would be safe to say prices will go further down.

They will go further down even if there are new supply outages in Nigeria or Libya – the market has basically gotten used to these as evidenced by the lack of any huge effect on international prices off the latest news from either Nigeria (new pipeline attacks) or Libya (plans to reopen four export terminals). While it’s true the latter could pressure international prices significantly if the plans announced come to fruition, the immediate effect has not been that great.

In the absence of any unforeseen events, crude oil might fall to lows last seen in February, especially when we factor in the behavior of Saudi Arabia, which seems to have no intention of curbing output and losing market share, and Russia, which is still pumping at record highs, despite a gaping budget deficit created by falling oil revenues.

Courtesy: Irina Slav

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