The rally in oil prices appears to be stronger than what many analysts have expected. In the past few months, many negative events have taken place around the world. Starting with the failure of oil producers to reach an output freeze deal during Doha's meeting, the continuous growth of Iran's oil output and OPEC's in general, and most recently the concerns over the Brexit.
These events have imposed a huge threat to the rally in oil prices. In fact, during each event, we saw many oil market analysts doubting the rally in oil prices and expecting it to reverse a course. However, the actual impact of such negative events have been limited in terms of the duration and the oil price volatility caused. Throughout these events, the oil prices rally has shown a huge resistance and continued its upward path.
The recent oil prices recovery after oil prices retreated in mid-June as the rising likelihood of a Brexit raised concerns about the economic fallout in Europe is a simple example of such a fact. Oil prices fell sharply below $50/bbl aimed worries over a possible Brexit from the EU. The fall in oil prices didn't last long. Oil prices recovered to levels above $50 a barrel despite the huge volatility caused by such an event.
What is next for oil prices?
Given the current positive market sentiments along with other positive news coming from around the world, oil prices will not stay at $50 a barrel for quite long. In fact, in the coming weeks, oil prices could head above $55 a barrel reaching to $60/bbl, and here is why.
1. Unchanged Interest Rate and Weaker U.S. Dollar
On Wednesday last week, the U.S. Federal Reserve decided to keep interest rates unchanged. The decision came as no surprise, especially after the brutal jobs report of May. Keeping interest rates unchanged means a weaker U.S. dollar. Given the inverse relationship between the greenback and oil prices, weakness in U.S. dollar is directly translated into strength in oil prices.
The Fed has also cut its economic growth forecast by 0.1 percentage point to 2 percent this year. With the Fed expecting a slower economic growth, interest rate hike is questionable. It will take a while until the Fed makes sure there are signs of economy strength. Till then, keeping interest rate unchanged will support the rally in oil prices.
2. Expected Oil Outages
Oil outages in many countries such as Canada, Nigeria, and Libya have increasingly contributed to the rally in oil prices over the past few months up until today. According to the IEA, outages from OPEC and non-OPEC countries cut global oil supply by nearly 0.8 mb/d in May. Although Canada's shut-in production will be fully restored in the near future, outages in both Nigeria and Libya appear to be escalating.
In Nigeria, militants attacks on oil and gas infrastructures have decreased the country's oil production to thirty-year lows. While government official say they have reached to a one-month ceasefire agreement with the rebels in the Niger Delta, what goes on the ground proves opposite. In fact, yesterday, the Niger Delta rebels denied having any ceasefire agreement with the Nigerian government. This news tell us one thing; militants attacks on oil and gas facilities will intensify in coming weeks.
Adding to the existing troubles the country is going through, the Nigerian oil workers threaten to go on strike over what they call it as an engagement of some companies in anti-labor practices. The oil workers have given these companies seven days starting on Monday, June 20, to change what the workers believe to be anti-labor practices. If the workers go on strike, the oil and gas industry activities will shutdown completely resulting in more oil outages.
Libya on the other hand is not in a better place than Nigeria despite occasional signs of optimism. The country's oil and gas fields and facilities are also under attacks from different militia groups. With the troubles the country is going through, it appears that Libya has a long way to go before making a significant increase to its oil production. For Libya, expectations are only for the worst to come.
3. U.S. Crude Inventory Drawdowns
The summer session is officially here. That means the seasonal U.S. inventory drawdowns is here as well. According to the EIA, the current session started with crude oil inventories at 531.5 million barrels as of 10 June. Crude inventory has declined for 3 consecutive weeks since then.
Inventory drawdowns are expected to increase from July to September as gasoline demand increases during the U.S. summer season. According to a report by Deutsche Bank, the rate of weekly drawdown should increase from the beginning of July and accelerate further into August.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Source: U.S. Energy Information Administration, Monthly Refinery Report
The API gravity of crude oil input to U.S. refineries has generally increased, or gotten lighter, since 2011 because of changes in domestic production and imports. Regionally, refinery crude slates—or the mix of crude oil grades that a refinery is processing—have become lighter in the East Coast, Gulf Coast, and West Coast regions, and they have become slightly heavier in the Midwest and Rocky Mountain regions.
API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, so light oils have high API gravities. Crude oil with an API gravity greater than 38 degrees is generally considered light crude oil; crude oil with an API gravity of 22 degrees or below is considered heavy crude oil.
The crude slate processed in refineries situated along the Gulf Coast—the region with the most refining capacity in the United States—has had the largest increase in API gravity, increasing from an average of 30.0 degrees in 2011 to an average of 32.6 degrees in 2018. The West Coast had the heaviest crude slate in 2018 at 28.2 degrees, and the East Coast had the lightest of the three regions at 34.8 degrees.
Production of increasingly lighter crude oil in the United States has contributed to the overall lightening of the crude oil slate for U.S. refiners. The fastest-growing category of domestic production has been crude oil with an API gravity greater than 40 degrees, according to data in the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report.
Since 2015, when EIA began collecting crude oil production data by API gravity, light crude oil production in the Lower 48 states has grown from an annual average of 4.6 million barrels per day (b/d) to 6.4 million b/d in the first seven months of 2019.
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production Report
When setting crude oil slates, refiners consider logistical constraints and the cost of transportation, as well as their unique refinery configuration. For example, nearly all (more than 99% in 2018) crude oil imports to the Midwest and the Rocky Mountain regions come from Canada because of geographic proximity and existing pipeline and rail infrastructure between these regions.
Crude oil imports from Canada, which consist of mostly heavy crude oil, have increased by 67% since 2011 because of increased Canadian production. Crude oil imports from Canada have accounted for a greater share of refinery inputs in the Midwest and Rocky Mountain regions, leading to heavier refinery crude slates in these regions.
By comparison, crude oil production in Texas tends to be lighter: Texas accounted for half of crude oil production above 40 degrees API in the United States in 2018. The share of domestic crude oil in the Gulf Coast refinery crude oil slate increased from 36% in 2011 to 70% in 2018. As a result, the change in the average API gravity of crude oil processed in refineries in the Gulf Coast region was the largest increase among all regions in the United States during that period.
East Coast refineries have three ways to receive crude oil shipments, depending on which are more economical: by rail from the Midwest, by coastwise-compliant (Jones Act) tankers from the Gulf Coast, or by importing. From 2011 to 2018, the share of imported crude oil in the East Coast region decreased from 95% to 81% as the share of domestic crude oil inputs increased. Conversely, the share of imported crude oil at West Coast refineries increased from 46% in 2011 to 51% in 2018.
Headline crude prices for the week beginning 7 October 2019 – Brent: US$58/b; WTI: US$52/b
Headlines of the week
In the October 2019 Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts lower crude oil prices in the fourth quarter of 2019 and in 2020 despite tighter global balances. The tighter balances are largely the result of unprecedented short-lived loss of global supply following the September 14 attacks on crude oil production and processing infrastructure in Saudi Arabia. The production declines contribute to overall stock draws in the second half of 2019 with a relatively large stock draw in the third quarter. In the fourth quarter, however, EIA forecasts global supply growth will outpace global demand growth, resulting in an inventory build, offsetting some of the third quarter draws (Figure 1). EIA lowered its crude oil price forecast for the fourth quarter of 2019 by $1 per barrel (b) to $59/b, reflecting current price trends, and lowered its crude oil price forecast for 2020 by $2/b to average $60/b because of expected supply growth.
In the October STEO, EIA forecasts total global petroleum stocks in the second half of 2019 will decrease by an average of 290,000 barrels per day (b/d), compared with the September STEO forecast stock build of 250,000 b/d for the same period. EIA forecasts total world crude oil and other liquids production for the second half of 2019 to average 101.3 million b/d, down by 550,000 b/d from the September STEO. Most of the production decline is the result of lower output from Saudi Arabia, reducing the collective output of the Organization of the Petroleum Exporting Countries (OPEC) to 34.8 million b/d for the second half of 2019.
In the October STEO, EIA assumed the Abqaiq facility and Khurais oil field would produce at their pre-attack levels by the end of October. Compared with the September STEO, EIA revised OPEC spare capacity, most of which is located in Saudi Arabia, lower by an average of 200,000 b/d in the second half of 2019. Saudi Arabia's total capacity (including spare capacity) declined following the Abqaiq attack, and EIA expects Saudi Arabia will use some of its remaining spare capacity to backfill inventories and lost production through the end of 2019. Beginning in January 2020, EIA forecasts that OPEC spare capacity will return above 2.0 million b/d.
Crude oil prices increased sharply following the attacks; Brent front-month futures prices rose by nearly 15% on Monday, September 16, the first day of post-attack trading. This increase was the largest one-day percentage increase on record for Brent front-month futures prices. The increase was larger in the front months of the futures strip than in the later months, indicating the market expected the outage to be relatively short lived, and prices fell quickly after the attack (Figure 2). Saudi Arabia continued to export crude oil by drawing from inventories, increasing production in other fields, and reducing domestic refinery inputs. Abqaiq's relatively quick return to operations likely lessened the extent and duration of the price increases. Brent front-month futures prices fell to lower than pre-attack levels on October 1, settling at $59/b for the December contract and have fallen slightly since then.
The relatively quick return to pre-attack price levels likely reflects demand-side concerns and increased down-side price risk. Despite tighter forecast global petroleum markets in the second half of 2019, EIA expects that the Brent crude oil price will average $60.63/b in the second half of 2019, nearly unchanged from the $60.68/b forecast in the September STEO. EIA forecasts that global petroleum inventories will increase by nearly 550,000 b/d in the first half of 2020, which is expected to put downward pressure on crude oil prices. EIA forecasts the price of Brent crude oil to average $57.34/b during the first half of 2020. However, EIA expects the price of Brent crude oil to increase to $62.48/b in the second half of 2020 as global petroleum stock builds slow and petroleum balances are relatively tighter than during the first half of the year.
The price forecast is highly uncertain and supply or demand factors may emerge that could move prices higher or lower than EIA's current STEO forecast. Driven by revisions to global economic outlook, EIA has revised its 2019 liquid fuels demand growth outlook lower in the STEO for the last nine consecutive months and 2020 consumption has been revised down eight of the last nine months. EIA's price forecast also accounts for a higher level of petroleum supply risk in the aftermath of the attacks in Saudi Arabia.
U.S. average regular gasoline prices increase slightly, diesel prices fall
The U.S. average regular gasoline retail price rose less than 1 cent from the previous week to $2.65 per gallon on October 7, 26 cents lower than the same time last year. The West Coast price rose by nearly 10 cents to $3.64 per gallon, and gasoline prices in California continued to rise, increasing by 14 cents to $4.09 per gallon, 55% higher than the national average and 39 cents higher than the same time last year. The Midwest price increased by more than 1 cent to $2.50 per gallon, and the Rocky Mountain price increased by less than 1 cent, remaining at $2.71 per gallon. The Gulf Coast price fell by more than 4 cents to $2.28 per gallon, and the East Coast price fell by 2 cents to $2.49 per gallon.
The U.S. average diesel fuel price fell nearly 2 cents to $3.05 per gallon on October 7, 34 cents lower than a year ago. The East Coast and Gulf Coast prices each fell by more than 2 cents to $3.04 per gallon and $2.80 per gallon, respectively, the Midwest price fell by 2 cents $2.97 per gallon, the Rocky Mountain price decreased 1 cent to $3.02 per gallon, and the West Coast price decreased by less than 1 cent to $3.64 per gallon.
Propane/propylene inventories increase
U.S. propane/propylene stocks increased by 0.1 million barrels last week to 100.8 million barrels as of October 4, 2019, 11.9 million barrels (13.4%) greater than the five-year (2014-18) average inventory levels for this same time of year. Gulf Coast inventories increased by 1.0 million barrels, and Midwest inventories rose slightly, remaining virtually unchanged. East Coast inventories decreased by 0.9 million barrels, and Rocky Mountain/West Coast fell slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 4.4% of total propane/propylene inventories.
Residential Heating Fuel Price Survey Begins This Week
Beginning this week and continuing through the end of March 2020, prices for wholesale and residential heating oil and propane will be included in This Week in Petroleum and on EIA's Heating Oil and Propane Update webpage.
As of October 7, 2019, residential heating oil prices averaged nearly $2.95 per gallon, 41 cents per gallon lower than at the same time last year. The average wholesale heating oil price for the start of the 2019–20 heating season is $1.99 per gallon, over 48 cents per gallon below the October 8, 2018, price.
Residential propane prices entered the 2019–20 heating season averaging nearly $1.86 per gallon, 53 cents per gallon less than the October 8, 2018, price. Wholesale propane prices averaged more than $0.58 per gallon, 43 cents per gallon lower than the same time last year.