Oil bulls have a narrow window for bullish bets as driving season and weather disruptions create a prime opportunity for a market rally. With the driving season in full swing and weather-related production disruptions upon us, now may be the best chance for a market rally this year.
It is a pivotal moment for bulls, with the tide expected to change after this quarter when the driving season ends.
Despite its presumption that global oil demand growth is on a long-term downward trend, even the International Energy Agency (IEA), often criticized for its anti-fossil fuel leanings, estimates that global crude oil inventories will draw down at an average rate of 800,000 barrels per day (bpd) between June and September—the height of driving season. This, despite Q2 global oil demand growth slowing to its weakest in more than a year.
Of course, that’s merely a prediction. But the reality paints a similar picture. In the last three weeks alone, U.S. crude oil inventories have drawn down by more than 20 million barrels, according to the Energy Information Administration’s (EIA) Weekly Petroleum Status Report. And while U.S. production is at its highest levels ever at 13.3 million bpd according to weekly EIA estimates, that was prior to storms that we know interrupted activities in some parts of the country.
Globally, the production scenario is more bullish. OPEC+ has extended its oil production cuts into next year, and Russia just this week said it would cut production even more than its OPEC+ quota dictated because it has pumped above its quota for months. It plans to cut additional production in the warm seasons of this year and next. But Russia will not be curbing additional production beyond its quota in the colder months due to technical issues related to the geology of its oilfields and climate—not to mention it simply requires more oil for domestic use in the colder seasons.
A Shift to Strength
The second quarter was weak for crude prices as the market worried about weak demand. Now, however, a new narrative is taking shape—one that speaks of a forecasted deficit.
According to EIA’s 4-Week Average U.S. Product Supplied—a proxy for demand—20.9 million barrels of petroleum were consumed in the week ending July 5. This is the highest level since last September. The latest data, issued this week on Wednesday, estimates that weekly petroleum product supplied fell back to 20.488 million bpd.
Although those are high levels, they are seasonal, and this bullish reality is expected to shift after driving season, with the IEA expecting global crude oil inventories to level out as oil demand growth generated from China slows.
China, China, China
Two things have been happening in China. First, China has been reducing crude oil imports. Crude oil imports averaged 11.05 million bpd in the first half of the year—a figure that is 2.9% shy of the first half last year, highlighting the weak oil market in China.
In June, China’s refiners had 15.67 million bpd of oil for processing—11.30 million bpd from imports, and 4.37 million bpd from domestic production. China’s refineries have seen a slowdown as well, only processing 14.19 million bpd on average in June. This mismatch in refining vs. imports has created a surplus of crude oil in the country, leading to the second thing: China has likely been stockpiling crude oil for the better part of this year.
If the world’s largest oil importer is building inventory, only a strong recovery in economic growth in that importer will turn the tide.
Of course, this hasn’t stopped OPEC from forecasting robust oil demand growth in China. In 2024, OPEC still sees China’s oil demand growth rising by 760,000 bpd—and this is a figure that OPEC just revised up for its July report.
The IEA, as one would expect, had a different view, with its demand growth estimates for China coming in at 500,000 bpd for the full year 2024.
Self-Fulfilling Prophecy
Traders and banks have a different view, and that’s one of strong consumption. Increased demand for gasoline and diesel due to the driving season has already boosted global oil prices by drawing down crude oil inventories in the world’s most transparent oil market—the United States. That bullish outlook is often a self-fulfilling prophecy when it comes to market pricing.
Brent crude is currently trading above $85 per barrel—a nearly $10 hike from the beginning of the year. As driving season in the world’s largest oil consumer comes to a close, one would expect inventories to begin building in the United States as well, and traders may anticipate the shift from bullish to bearish. And when it comes to market speculators, just the anticipation can make it so, even if inventories fail to build.
By Julianne Geiger for Oilprice.com
