Summer sets in raising hopes for oil demand growth
Fears oil demand will be bearish this summer set in after oil prices began to plateau immediately after OPEC members agreed to on May 25 to maintain current oil output cuts by 1.8million barrels per day till March 2018 but anticipated rise in demand from US and Saudi Arabia may offset declining demand.
Following the announcement, oil prices dropped from a high of $54 per barrel settling around $48, as markets were disappointed that the cuts were not deep enough. Markets were betting on deeper cuts and longer tenure giving rise to a bearish outlook going into summer.
However, one of hallmarks of summer is that the price of gasoline rises and oil demand goes up too in the United States and Saudi Arabia.
US gasoline could see increased demand fuelled by increased travel both by air and land. This could result in significant drawdowns of US crude stocks by as much as 10 million barrels per week according to analysts at Oil Price, an oil market tracking news website.
The US Energy Information Administration expects the retail price of regular-grade gasoline will average $2.46 per gallon (gal) during summer 2017, up from an average of $2.23/gal last summer. Gasoline prices are forecast to be higher this summer compared with last year primarily because of Brent crude oil prices are expected to average $8 per barrel higher than during last summer. The forecast monthly average retail price of gasoline increases from $2.39/gal in April to $2.51/gal in July before falling to $2.43/gal in September.
A similar situation plays out in Saudi Arabia, one of the world’s largest oil producers. During summer, the country sees higher local oil demand both for road fuel and in the power sector and this raises market concerns about its export potential. Diesel and gas consumption in the country’s oil sector is set to grow in tandem with growth in electricity demand fuelled by low electricity prices.
This is also true for other Persian Gulf states such Kuwait and the UAE which also spikes during summer largely because they burn crude for electricity too. Also the Ramadan period will see many people in doors and raise electricity demand further. In anticipation for this rise, Saudi Arabia is expanding its Wasit natural gas plant to replace over 100,000 bpd of crude use and another gas powered plant is due in 2019.
Oil Price says electricity use increases dramatically over the summer in this part of the world as scorching summer temperatures send residents inside to turn up their air conditioners. In 2014, for example, Saudi Arabia burned almost 1 million barrels of oil per day in the month of July – up from the 600,000 bpd it usually burns for domestic use.
While China have used the fall of oil prices to expand its petroleum reserves and increase its storage capacity, demand have started to slow. Imports fell by 9 percent in April. Demand is also affected by refinery maintenance which contributes to a stock build up could last months.
Also the Chinese government is limiting the quantity of crude oil independent refiners can bring into the country to a combined 2 million bpd. A significant lull in Chinese demand.
China may very well limit its oil imports this summer in order to draw down its burgeoning oil stocks, which will look like slackening demand. This could counteract strong demand in the US and Persian Gulf and put downward pressure on oil prices over the summer.
ISAAC ANYAOGU