The holiday season is off to a lukewarm start

The start of the summer season has been marked by lower-than-expected demand for fuel. Although motorists are enjoying lower prices, refiners, especially in the US, are struggling with weak revenues. As refiners expected demand to be around 9 million barrels per day in the first week of June, they have adjusted their activity accordingly. However, the U.S. is currently running at its lowest level since the comparable period in 2021. Because of this, refiners have high inventories of unconsumed fuel. In addition, if predictions of a hurricane season in the U.S. coming as early as August should come to pass, it could force some refineries in the Gulf of Mexico region to shut down. [1] Analysts and industry experts are monitoring the situation, and it is not yet clear whether the low fuel consumption is just related to the delay of the summer holidays, or whether it is a change in consumer behavior and a future trend.[1][2]

The conflict in the Middle East

In addition to fundamentals such as supply and demand, the oil price is also driven by other stimuli. In recent months, it is mainly the state of conflict in the Middle East that has caused considerable volatility in black gold.* The looming danger of war operations spreading to other parts of the region and the involvement of other countries often cause price increases. Most recently, it was reports of multiplying border fighting between Israel and Lebanon. This caused a price surge this week that erased losses since the beginning of the month. Although events in the Middle East do not pose an immediate threat to oil supplies, the risks will be reflected in prices almost immediately. With no end in sight to the conflict, we can also expect continued market volatility. [2]

OPEC+ is losing its influence in the oil market

Oil prices have been in decline since their peak in early April due to speculation that the Organization of the Petroleum Exporting Countries (OPEC+) will eventually increase its production. However, at its meeting on June 1, the grouping agreed to extend supply curbs until October 2024, when it will begin gradually restoring them. According to forecasts by the International Energy Agency (IEA), OPEC+'s influence on the market may gradually wane and the restrictions in place may not be sufficient. Indeed, the IEA forecasts a potential surplus in oil stocks by 2030, when it could reach up to 8 million barrels per day. This surplus could reportedly cause a price collapse similar to that seen at the start of the Covid-19 pandemic. The decline in demand for black gold is expected to be linked in the long term mainly to a gradual shift towards renewable energy sources. [3]

Economic factors

The prospect of interest rate cuts, particularly in the US, which is one of the largest consumers of oil, also plays a significant role in determining its price. Recently, Fed officials have said that they foresee only one cut this year. Higher borrowing costs may ultimately mean slower economic growth and less demand. [4] In contrast, the European Central Bank has already cut rates by 0.25%, but wants to proceed cautiously with further easing because of the risk of persistent inflation. The European Union is also one of the largest oil consumers. [4]

Oil futures prices

The summer increase in fuel demand has been smaller than expected, but analysts say it is too early to draw conclusions. After Monday's surge, the price of the August Brent Oil Futures contract, which is used to determine fuel prices in Europe, held above USD 84 per barrel and the value of the US Crude Oil WTI Futures contract for August delivery was just below USD 80 per barrel.* Monday's data on industrial activity in China, the largest global oil consumer, disappointed expectations and helped to moderate the price increase. Global oil demand was weaker in the first quarter of 2024 compared to the same period last year, and analysts say we will see weakness in the second quarter as well.[5] [5] 

Brent Oil Futures for August delivery over the last 5 years (Source: investing.com)*

Crude Oil WTI Futures price trend for August delivery over the last 5 years (Source: investing.com)*

Conclusion

The oil price remains highly volatile, although there is talk of it gradually stabilising in the coming months. Based on the above, consumers should not be concerned about the price levels we have seen over the last 2 years. Traders, on the other hand, are hoping that the summer season will finally get underway and with it fuel consumption, which will mean higher revenues for them. For now, however, the near-term outlook remains uncertain. [6]

Adam Austera, Principal Analyst at Ozios

* Past performance is no guarantee of future results.

[1,2,3,4,5,6] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.

[1] https://www.investing.com/news/commodities-news/analysisglobal-gasoline-refining-margins-slump-on-slow-summer-driving-season-3486332

[2] https://ca.finance.yahoo.com/news/refining-margins-squeezed-tepid-demand-000000449.html

[3] https://edition.cnn.com/2024/06/12/energy/opec-oil-price-grip-loosen-iea/index.html

[4] https://www.reuters.com/business/energy/oil-prices-edge-up-optimistic-demand-outlook-2024-06-12/

[5] https://www.investing.com/news/commodities-news/oil-up-on-firming-demand-mideast-tensions-underpin-risk-premium-3487881