Normally, demand for crude oil and fuel drop off sharply after the first week of July. However, this year, demand for both gasoline and jet fuel has remained strong through August in the U.S. and Asia.
Add in the fact that Saudi Arabia and Russia have now extended production cuts through the end of the year, and the current tight supplies of fuel (especially gasoline) should tighten further.
Still, there is a lot at play both domestically and globally. While China has seen a weakening in its manufacturing sector, travel demand has remained elevated, based on air and road traffic numbers. Meanwhile, as of the first week of September, U.S. storage levels of crude have dropped to nearly 16 MMbbl below the five-year average, with the NYMEX delivery point in Cushing, Oklahoma, storage dropping to a new yearly low.
So, why have U.S. crude oil rig counts continued to fall even with the steady increase in prices? The trend continues to reflect the “new” discipline that is being practiced by producers, in that higher interest rates and higher labor costs are now affecting drilling cost and moving break-even prices even higher out in the price curve. Therefore, even the latest strength in prices may not be enough to trigger a new drilling spree.
What could cause prices to weaken from here?
Looking forward, prices are overdue for a seasonal correction in demand, and I think it is coming. The big question will be how much seasonal pullback will be seen. If OPEC+, including Russia, continues to curb production and exports into 2024, and we continue to refill the Strategic Petroleum Reserve (SPR), then the pullback should be minimal and back month futures could be underpriced.
However, if the U.S. Federal Reserve continues on its hawkish path of raising interest rates (which is still a good possibility), it could trigger a “demand fear” sell-off before new winter demand emerges. Another release out of the SPR is possible if prices escalate much further, and that, too, could lower prices.
And so, there are still a lot of unknowns. However, one thing is clear: price volatility should continue with us well into the end of the year.
Recommended Reading
After 4Q Struggles, Transocean’s Upcycle Prediction Looks to Pay Off
2024-02-21 - As Transocean executives predicted during third-quarter earnings, the company is in the middle of an upcycle, with day rates and revenues reaching new heights.
Deepwater Roundup 2024: Americas
2024-04-23 - The final part of Hart Energy E&P’s Deepwater Roundup focuses on projects coming online in the Americas from 2023 until the end of the decade.
Rystad: More Deepwater Wells to be Drilled in 2024
2024-02-29 - Upstream majors dive into deeper and frontier waters while exploration budgets for 2024 remain flat.
E&P Highlights: April 8, 2024
2024-04-08 - Here’s a roundup of the latest E&P headlines, including new contract awards and a product launch.
Deepwater Roundup 2024: Offshore Europe, Middle East
2024-04-16 - Part three of Hart Energy’s 2024 Deepwater Roundup takes a look at Europe and the Middle East. Aphrodite, Cyprus’ first offshore project looks to come online in 2027 and Phase 2 of TPAO-operated Sakarya Field looks to come onstream the following year.