Soon the weather will be warmer, the sun will be out and vacation season will be in full swing. Traditionally, this is the time of year when consumers see a rise in gas prices because of the increased demand, which can influence the price of crude. However, investors should remember that gasoline is only one product of crude oil and there is no shortage of black swans that might rally the price of crude beyond the driving season’s increased demand.
The Vacation Demand Curve
The summer season in the northern hemisphere is frequently when the demand for crude spikes. However, there are a few factors that are going to influence the cost, supply and demand for crude during this year’s summer driving season. The worldwide stockpile of gas will provide a cushion for the increase in demand. This, along with the increased production from non-OPEC nations, might not strain the crude supply as much as it has in the past. It may result in a reprieve in higher prices paid by consumers at the pump. Although the gas stations seem to raise their prices easily when crude rallies, they tend to hesitate on the way down by justifying the product and not crude. They play on both sides of the fence, which may cause higher pump prices regardless of crude’s movement.
A Pipe Dream
Last year, crude prices experienced a low at the start of the travel season, setting the stage for a higher range in price volatility. This year, crude might live in a higher range with lows related to the higher average. A solid stream of supply data continues to show a surplus of crude, and the future of the industry might be leading towards an increase in supply. (Especially when the Dakota Access Pipeline project is completed and shale drilling increases in the United States.)
Ready. Set. OPEC.
While OPEC’s influence on the markets may be waning, the world still reacts to their words. The production cuts set in motion in late 2016 have lead to an interesting development of events in 2017. Supply from OPEC nations has decreased, but at the same time, supply from non-OPEC countries has risen, subsequently leading to Russia being the world’s largest crude producer. With the shift of the world’s supply away from OPEC, it may open the door to complications. Members may want to renegotiate the production cuts or leave the agreement altogether similar to how Iran broke the agreement to begin trading with Asia. Saudi Arabia also caused waves of complications with its gridlock of opposing words. The country claimed there were deeper production cuts than expected and followed that up with an announcement that there was an increase in production. As always, OPEC remains a wild card that may drive the price of crude in either direction at any moment.
It is commonly understood that predicting the price of oil is rarely accurate as supply disruptions, OPEC announcements and consumer behavior remain wildly unpredictable. However, crude prices may increase with the traditional spike of demand for gasoline over the summer months. It will be interesting to keep an eye on the crude markets with the larger-than-ever worldwide production of crude and the current stockpile of barrels. As always, it is recommended that you invest with a trusted advisor.