Twice a year, U.S. refineries switch production from summer gasoline blends to winter blends, and vice versa. (California is an exception with more than two different grades). The switch to winter blends is in progress, and winter blend gasoline will be available in the United States in mid-September. For U.S. consumers, this means a slight decrease in gasoline prices. For oil traders this means the end of the U.S. summer driving season and the release of key data on oil demand. Did U.S. motorists drive enough this summer to decrease the oversupply of oil?
Summer Data
Investors will be paying attention to the driving numbers coming out of the U.S. from organizations like AAA to determine how much oil was used during the summer. Also important is how much oil was used for electricity production in the Middle East to power the air conditioners during the summer season. And in the beginning of September, investors will also watch for the OPEC/non-OPEC compliance numbers to see if those countries are still keeping their production down.
Projections for U.S. Crude Stores
Analysts at S&P Global Platts are optimistic that there were significant draws from U.S. crude oil storage. They expect inventories to come in only 23% above the 5-year average after the summer gasoline usage. This would be a positive for oil prices, because it would reflect a significant decrease from just 5 months earlier when U.S. crude oil stores measured 34% above the 5-year average.
The Refinery Impact
If the Platts’ estimate is accurate, it could help to keep the price of oil from decreasing as seasonal demand decreases and as U.S. refineries conduct maintenance during the colder months. This depresses crude prices, because at those times less crude is processed and tends to build up in storage.
At the same time, European refining in the coming weeks and months may serve as a boost to oil prices, because several major European refineries are working to replace gasoline and diesel stocks after recent outages (strengthening prices).
Other new refining capacity—particularly in China and Vietnam—is expected to come online shortly, which will also be a boost to crude oil demand (strengthening prices). Finally, analysts also expect significant seasonal crude oil draws in late autumn from Latin American refineries (strengthening prices), but that is further in the future.
What Oil Traders Are Seeing Now
All of these signs appear lost on oil traders, however. Generally, they seem more attuned to reports of slightly lower July output from Chinese refineries (depressing prices), Baker Hughes rig count reports indicating that the number of active oil rigs in the U.S. is the highest it has been since April, 2015 (depressing prices), and data showing slightly higher production from OPEC countries in July (depressing prices). A recent IEA report indicated that although the OPEC-non-OPEC production cuts brought a decline of 500,000 bpd in Q2, it would take much longer than expected to bring global inventories under the 5-year average (depressing prices).
The bottom line is that even though some signs indicate the global oil glut is slowly decreasing, oil prices are still precarious. Perception, not reality, will continue to have the greatest impact on prices in the short term.