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A Volatile Summer For Energy Markets

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It really didn’t matter that U.S. crude production hit the all-time high of 11 million barrels a day in output according the Energy Information Agency’s Weekly Petroleum Status Report on Wednesday. Nor did it faze anyone that the country saw a surprise 5.8 million barrel build in stockpiles, fundamentals were cast aside Wednesday and Thursday as traders raised oil from its Tuesday depths of $68.08 a barrel for WTI and $72.16 for Brent, to nearly $70 for WTI and $72.50 for Brent oil. Contrast this to last week when the same EIA report showed a whopping 12.9 million barrel draw in U.S. crude inventories and oils collapsed nearly $4 a barrel. The counter-intuitive moves can only mean one thing: volatility.

But what does that really mean and how long before predictability returns to the oil markets?

The answer may lie in the opaque circumstances of a global economy that, while showing signs of strength, is nevertheless caught up over the seemingly day-to-day news of growing global trade strains and political posturing over crude supplies. A seemingly daily stream of news suggesting tariffs and retaliations, promises to hike output, production challenges from Venezuela to Libya to Canada, release of strategic oil supplies, sanction shut ins and higher costs for take away capacity in many shale plays due to duties on steel and aluminum used for pipelines, keeps perspectives on edge. In the midst of those who maintain that the world remains amply supplied when it comes to oil, others are adamantly unconvinced and that the global crude market is currently undervalued.

Perhaps the best way to sort this all out is to look at a major clue from this week’s EIA report which showed that on the refined side of the data, a big 3.2 million barrel decline in gasoline stocks and a 380,000 barrel fall for distillates is a clear signal that upward price pressure is linked to the demand side of the equation with refiners running at lower levels of output (94.3 %) and critically low storage levels at the WTI oil hub at Cushing, Oklahoma. Despite pump prices leading upwards across North America and indeed the world, demand does not seem to have suffered. Just the opposite, in fact, with continued expectation that total global oil demand will rise 1.2 to 1.5 million barrels a day for 2018 and EIA data pointing to an implied 9.8 million barrels a day, there is more to suggest that consumption will continue to propel energy values, once the smkoke from other matters clears.

With midsummer volatility gripping markets, expect higher and more stable prices for oil and fuel, once the dust settles. What you see is what you can expect for a few more weeks anyway.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded tomorrowsgaspricetoday.com to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.