Oil Price Outlook: Strong Projections, But Details Tell A Different Story

With oil prices now in the same price range they saw in mid-March, the commodity seems to have recovered from its brief swoon.

WTI Crude Oil Monthly Chart

Still, news about the industry is not always as it is presented. In Asia, Aramco’s decisions are being falsely touted as negative evidence for oil demand. In the United States, air travel forecasts sound promising, but we are not going to see a return to normal just yet.

Saudi Price Cut Hides More Output

Aramco (SE:2222) announced a cut to its June OSPs (official selling prices) for Asia, after several months of raising them. The talking point is that this is a reaction to an increase in COVID-19 infection rates in India.

However, it is more likely that this change in pricing reflects the fact that Saudi Arabia (and other OPEC+ nations) is increasing its oil production this month and that India specifically cut its purchases of Saudi oil by one third for the month of May.

State-owned Indian Oil Corporation (NS:IOC) ordered only 65% of its monthly average from Saudi Arabia in May. Instead, it opted, like other refiners in India, to order crude oil from Guyana, Norway, Brazil and the United States.

India cut its orders from Saudi Arabia after the Saudi oil minister publicly refused a request from India to increase oil output and told India that it should just use its stored oil, which it bought cheaply months ago.

That unsolicited advice did not go over well with India.

Now that India is facing a new COVID-19 outbreak, the expectation is that Indian refiners will cut crude oil purchases to reflect lower domestic demand. However, it isn’t clear yet if Indian demand for petroleum products has dropped or if Indian refiners are cutting crude oil orders.

As of last week, Indian refineries planned to continue producing products, with plans to sell the excess to regional markets unaffected by the latest coronavirus surge.

U.S. Summer Season: Bigger Expectations

Meanwhile, jet fuel demand in the United States is expected to increase by 30% this summer from Q1. All increased fuel usage will be a positive for prices, but it may not be as exciting as it sounds.

First, summer travel is typically up from Q1, which is post-Christmas wintertime. The expectation for this summer is that jet fuel demand will be higher than Q1; that follows general norms. How travelers plan to navigate their trips is also critical.

Analysts also expect more driving over the summer, which is good for demand but also an indication that many travelers are still be forsaking planes for the roadway. It is irrelevant whether they are avoiding planes because of fears of the virus, because they don’t want to wear masks or because of uncertain potential requirements for virus-related documentation.

Though the majority of adults in many developed countries have been vaccinated, this compliance has not led to a return to normal yet.

When big projections are released, it is necessary to look at the details.