Oil prices finally rose at the beginning of this week, ending a seven-day streak of losses. However, prices have been volatile in intraday trading and seem to be reacting to uncertainty over coronavirus news, which changes frequently.
But, COVID-19 isn't the only factor currently driving prices. And as we seem to be heading into a volatile period, here are six events traders should be aware of that may also affect price stability near-term.
1. Refinery Maintenance Season
In July, India conducted maintenance on its refineries, resulting in lower-than-average crude oil imports. India’s July refinery maintenance coincides with monsoon season in much of the country when demand for petroleum products is lower.
Data show that India’s crude oil imports in July were the lowest in a year, even lower than when India faced a wave of coronavirus infections in the spring of 2021. India is the third largest consumer of crude oil, and it imports all its crude oil supplies. Moreover, India is likely to see strong growth in oil consumption in the coming years. Therefore, it is important to understand such predictable and known trends in Indian demand.
In the United States, which is the largest consumer of crude oil, refineries enter planned maintenance each autumn in September and October. In general, we can expect to see demand for crude oil drop. We can also anticipate crude oil inventories to build during this time. It is worth noting that U.S. crude oil inventories are currently below the 5-year average. EIA data in September and October is anticipated to reflect a slight rise in inventory numbers.
2. Sale Of Strategic U.S. Petroleum Reserves
The U.S. Department of Energy will be selling 20 million barrels of oil from the Strategic Petroleum Reserve (SPR). Refiners must send their bids by Aug. 31, with contracts to be awarded Sept. 13. The oil purchased will then be delivered on Oct. 1 and Dec. 15.
It is important to note that this sale has nothing to do with the current conditions of the oil market and was planned long in advance. In fact, it was legislated in 2015 and 2018 as part of the Bipartisan Budgets Acts. The sale is designed to raise revenue for the federal government as well as clear space in the SPR so that maintenance work can be conducted.
Traders should be prepared to see this oil hit the U.S. market in the fourth quarter of this year, and it is likely that the added supply will impact weekly EIA data for the delivery weeks. It will also likely help bring down gasoline prices in the United States, although the sale was not intended to produce this result at the time of authorization.
3. Restart Of Federal Oil And Gas Leasing Program
Last week I wrote that a lawsuit filed by API and several other industry trade groups had prompted the Biden administration to officially end its moratorium on new oil and gas drilling leases on federal land. However, at that time there were still no plans to actually issue these leases.
Now, the Interior Department has announced that it will issue a formal notice in September to reschedule a lease auction for offshore leases in the Gulf of Mexico as soon as October. The Bureau of Land Management will also post a list of parcels for potential sale for onshore oil and gas drilling within the next week. Sales notices will be announced in December.
The move comes at a time when U.S. oil producers are very skittish about increasing production. Most companies have been holding on to cash, paying down debt, increasing dividends or expanding by purchasing other companies. Some of the hesitancy to drill more, even at a time when prices support increased production, has been due to regulatory uncertainty from the Biden administration regarding oil and gas policies.
If the response to these sales is robust, it will indicate that companies have secured capital to expand drilling and are becoming more positive about the regulatory environment towards oil and gas in the United States. This would be a sign that we can expect to see a more vigorous recovery of U.S. oil production in future months and years.
However, if the response is tepid, it will indicate that oil producers are still wary of the Biden administration’s intensions vis-à-vis oil and gas production and that we can expect production in the United States to remain stagnant.
4. Decline In Asia’s Jet Fuel Demands
According to Rystad Energy, jet fuel demand for August from Asia has dropped below levels observed in Europe for the first time since July 2010. In January 2020, Asia’s jet fuel demand was 50% higher than Europe’s. It is concerning for the global market, because it indicates that Asia is not out of the woods when it comes to oil demand.
Oil prices rose on Wednesday based, in part, on the idea that coronavirus issues in China are resolving. However, falling jet fuel demand in Asia indicates that the region still faces issues with oil demand, that may or may not be directly tied to coronavirus.
5. Tropical Activity In The Gulf Of Mexico
According to weather forecasters, it is likely that a tropical depression will form in the Gulf of Mexico this weekend. It is still too early to know if this storm could impact the oil infrastructure-heavy Texas and Louisiana Gulf coast, but longer-range forecasts indicate that it could impact areas of significant oil refining and/or import/export infrastructure.
Traders should also consider the possibility that offshore oil and gas platforms could be shut and evacuated if the storm moves into that part of the Gulf later next week or beyond.
6. Fire On The Pemex Oil Platform
A fire on an offshore oil platform owned by Mexico’s national oil company, Petroleos Mexicanos (Pemex), this past weekend has taken 125 wells and 421,000 bpd of oil production offline. Production was boosted in other fields, but still, Pemex’s production dropped by 25%. So far, 71,000 bpd of production has been restored and another 110,000 bpd is expected to be restored in the next 3 days. However, Pemex does not expect to bring the full 421,000 bpd back online until Aug. 30.
The prices of heavy sour crude oil grades traded in the U.S. have been rising as a result. The U.S. Gulf Coast is the largest buyer of sour crude grades from Mexico. Refiners are looking to buy this grade elsewhere, and prices for Western Canadian Select (WCS), a similar grade of crude oil produced in Alberta have been rising as a result. However, it is difficult and expensive to transport WCS to Gulf Coast refineries, especially since construction of the Keystone XL pipeline was cancelled.