Though economic and political events continue to drive oil prices as well as energy market volatility, seasonality can provide an additional catalyst. As we head into September, here are three things that could impact the direction in which oil prices head next:
1. Consumers in the United States can expect gasoline prices to start dropping after the Labor Day Holiday next week. Typically, gasoline prices in the US decline during the autumn months as demand drops and refineries produce the less expensive “winter” blend gasoline. Crude oil prices have been relatively stable over the past month, which has, in turn, prevented spikes in gasoline prices. This is in contrast to the start of the summer when the prices spiked around the Memorial Day holiday.
Of course, we are also entering the most volatile part of hurricane season in the US, which ends in November. If we do see a hurricane develop in the southeastern states, gasoline prices could spike in certain regions in response to actual or just potential supply disruptions.
Looking a bit farther out towards November, gasoline prices could be in for a wild ride as the new US sanctions on Iran’s oil and gas exports begin in the first week of that month. This coincides with the midterm elections in the United States, so it is likely that the current administration will employ a variety of strategies to make sure gasoline prices do not spike right as voters go to vote. If the threat of price spikes appears, it could mean the US might consider releasing oil from the US Strategic Petroleum Reserve or further pressuring Saudi Arabia to increase its oil production in October and November.
2. The major issue facing the global oil market over the next several months is the effect of the Iran sanctions. Initially, analysts seemed convinced that US sanctions alone would not have a major impact on Iranian exports. As the deadline to comply with the sanctions approaches, it is becoming clear that the US-led sanctions will in fact have a significant impact.
According to a new Wall Street Journal report, Iranian oil exports are expected to drop to only 1.5 million bpd in September. In June, Iran was exporting about 2.3 million bpd. If Iran’s oil exports are expected to decline by 800,000 barrels per day two months before sanctions are even implemented, then we could see a significantly higher total amount of oil off the market once sanctions take effect. Back when sanctions were first announced in May, many analysts were forecasting that only about 300,000 to 500,000 bpd might come off the market. Now, even conservative estimates range from 800,000 bpd to 1 million bpd, with other analysts predicting that as much as 2 million bpd could come off the market.
It is unlikely that the market has priced in the full effect of the sanctions. The global oil market is not nearly as oversupplied as it was last year or in 2016, so over the next few months we should expect that news concerning the Iran sanctions will drive oil prices higher. The type of news that could cause price increases includes revelations of waivers being denied or reports that global refiners have dropped imports from Iran.
3. A new report by Wood Mackenzie offers a look at oil demand growth in the longer range. Specifically, it examines Chinese vs. Indian demand growth and predicts that oil demand growth in India will overtake the growth in China by 2024. The global energy consulting group sees India’s expanding middle class as the primary driver of demand growth. According to the Wood Mackenzie report, India will need to import an additional 4.7 million barrels per day of crude oil to meet gasoline and diesel demand. Moreover, this has an impact on energy equities, as India will need to expand its refining capacity to accommodate its expected demand growth, or it will have to start importing gasoline and diesel. If the WoodMac forecast is true, the downstream energy opportunities in India will be even more significant, and Indian demand will be a larger long-term driver of oil prices.
India has been on the radar of big oil companies looking to expand their refining arms for some time now. Last year, Rosneft (OTC:OJSCY) purchased Indian refiner Essar Oil (now named Naraya), and it is looking for more opportunities there. This past April, Aramco and several Indian firms signed an initial deal to build a $44 billion refinery and petrochemical product plant in India.
It is clear that while India’s refining capacity is in need of expansion, big global firms have been responding to the expected demand growth with new projects already in the pipeline.