At a Glance
- The normal crude oil dynamics may not be the dominant factor in prices
For at least the last 20 years, there have been two consistent periods of “seasonality” in which crude oil market trends could be somewhat predictable. The periods of February, March and April would have a bullish undercurrent as we entered the summer driving season, and the periods of October through November would have a bearish undercurrent as we exited the summer driving season.
They certainly don’t make things like they used to. In 2017, crude defied its seasonal trend and rallied almost 11.2 percent from the beginning of October through the end of November and so far, we are headed for similar defiance of seasonality in 2018. Here are three things to watch as we start Q4:
As of August 18, the OPEC Monthly Oil Market Report listed total OPEC production at 32.565 million barrels per day (bpd). That’s up 265,000 bpd but still short of the 2016 average by almost 500,000 barrels. Meanwhile, Russia has reached a post-Soviet era record in crude production, pumping between 11.29 million and 11.36 million bpd.
In June of this year, the OPEC/Russia coalition agreed to increase production by about 600,000 bpd, but it seems Russia may have taken all of that increase and possibly more. The officially reported Russian production figure in May 2018 was 10.57 million bpd and by June it was already up to 11.1 million bpd. Will this coalition hold or will OPEC start pumping at full-throttle as well? History shows that if one country takes advantage, the rest will follow.
The effectiveness of U.S. sanctions is not the only thing to consider here. According to OPEC, Iran produced just over 4 million bpd in December 2016 and as much as 3.87 million bpd in November 2017. By August this year, they were down to 3.8 million bpd, which doesn’t seem like much of a drop considering the U.S. is aiming for zero foreign purchases of Iranian crude. Are the sanctions being blatantly defied? Yes and no. The first round went into effect on August 7, and some countries have complied.
According to reports, South Korea, for example, has placed no orders from Iran in the past three months. Iran however, is being clever with tanker movements. According to Tanker Trackers, some Iranian vessels are turning off their transponders while out on the water. One ship they track “disappeared” when their transponder went dead and reappeared off the coast of India. The level of crude produced in Iran may not shrink much if this strategy works.
Then there is the military threat. On September 22 Iran suffered its worst terror attack in a decade with 25 people being killed and another 60 wounded. The assault was blamed on Iran’s Arab separatists who Iranian officials claim are supported by the U.S. Iran vows revenge and one way to take that revenge would be to try and block the Strait of Hormuz, which is a key shipping lane for crude oil. If successful, that would reduce supply dramatically.
The Strategic Petroleum Reserve (SPR)
There are currently around 660 million barrels of assorted grades of crude oil in the SPR. Combined with private stocks that amounts to about five to six months of supply for U.S. consumer demand. The president has been pressuring OPEC to produce more in light of the Iran situation and so far they haven’t confirmed they will do so, which for our purposes means a refusal. At the 73rd annual gathering of the United Nations on Sept 25, President Trump specifically called out OPEC countries for their lack of assistance in reigning in energy prices. If he doesn’t get some sort of production increase out of OPEC, he could very well use the blunt force tool of releasing barrels from the SPR, though U.S. Energy Secretary Rick Perry has said the U.S. will not tap the SPR.
That could lower oil prices, but likely would have little effect on gas prices unless it was a series of scheduled releases and even then he’d be sending barrels to refineries already operating at near full capacity. It may be an unconventional move, but unconventional is this president’s way and considering the amount of production the U.S. is currently generating, the SPR could be reimbursed in short order.
Volatility and crude oil have gone hand in hand for a long time, but seasonality used to be the calming rest period. That may no longer be the case.