A seasonal event that happens every year may be what finally pushes oil prices to rock bottom.
West Texas Intermediate crude (: @000CN15U) futures broke below their 2015 low this week and are trading around $42, a more-than-six-year low. The bottom in this market has been elusive, with Wall Street targets consistent in that they have been missing the mark, as oil plunged into the $40s after roaring back to the $60s in a head fake rally during the spring.
Now, the next mile marker for the futures market appears to be on the downside, with oil heading toward the $40-per-barrel level. Many traders then expect to see prices settle somewhere in the $30s before a bottom is reached.
What analysts think might bring about the last gasp for oil prices is a phenomena that comes around twice a year-the refining maintenance season.
This just may be the most important turnaround by refiners in years, and those refiners have been running at full throttle due to the extremely high product margins, also known as crack spreads.
With as much as 2 million barrels of spare crude supply on world markets, the U.S. refining maintenance season could sap just enough demand from the market to cause another sharp drop in crude prices.
Fall refining maintenance, or the shoulder demand season as it's known, starts right around Labor Day, when driving demand drops off, and it doesn't end until around Nov. 1.
"There's just not much indication that the downside is done yet," said Kyle Cooper, managing director of research at IAF Advisors and Criterion Research. "With crude imports above 7 million barrels, there's still plenty of crude in the market."
In the fall, refiners switch over from summer grade gasoline to winter heating oil as well as winter weight fuels.
"In September and October, we historically see runs drop off between a million and 1.5 million barrels a day," Cooper said. "At high levels, like we've been running, it's not unrealistic to see crude runs drop off at 1.5 million a day."
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The industry has been processing about 17 million barrels a day of oil, and 1.5 million of crude is a decent size chunk.
As a point of reference, the U.S. produces about 9.4 million barrels a day of crude oil and has been importing an additional 7.5 million barrels.
"Now, you've got to go back and look at the 2009 low in the low $30s. If we keep getting 7 to 7.5 million barrels a day of imports, with refiners about to go into maintenance, you're going to start seeing 6, 7 million barrels build (per week) on the crude headlines."
That build in oil should put more supply into the Cushing, Oklahoma, storage facility. Traders have been watching Cushing closely this year, as supplies there edged close to capacity. The fear is oversupply there would mean a glut across the industry, triggering a possible oil fire sale in a new round of price cutting.
As traders shift focus to the refiners' maintenance, they also are watching the charts at $32.70, the low point for WTI futures in January 2009.
"We got down to around $33. ... That's the kind of number I'm looking for," said John Kilduff, energy analyst and partner Again Capital. "Is there a chance you hit a brief period around $29? Maybe."
Kilduff said the price should then quickly climb back into the $40s once a bottom is set.
"Then, we'll watch how the production decline in the U.S. is progressing," he said. "The forecasts are for it to be back under 9 million barrels a day in 2016, and we should see some progress towards that in the late October/early November period, just as prices are bottoming."
U.S. production topped out at about 9.6 million barrels, according to weekly data, but it has held at around 9.4 million, defying forecasts of a decline. Along with the revised forecasts for oil targets by some analysts, there is also now an expectation by the industry that low prices are here to stay for a longer time, in part because shale producers are able to produce with lower than anticipated prices.
"Technically since last June, this market has had a number of opportunities to find its footing, and it just hasn't," said Cooper. "The second quarter reports from the E&P companies were quite bearish for oil, but they were more supportive for natural gas."
The market, in fact, got a whiff of the impact of less refining utilization just this week. Analysts say the outage at BP (London Stock Exchange: BP.-GB)'s Whiting refinery, affecting about 240,000 barrels of refined product, actually was a negative for oil prices since traders took it to mean less crude would be processed. Refining outages typically turn out to be positive events for oil prices since the resulting rise in gasoline usually pulls up crude prices on a relative value basis.
"You're seeing oil prices get depressed because if the refinery is not processing crude, those inventories have to go somewhere, and those inventories are going to pile up in Cushing and Canada. One of the biggest impacts we see is the price of Canadian crude sliding. Now, it's close to $20 a barrel," said Andrew Lipow, president of Lipow Oil Associates. Canada is the major supplier to the BP refinery.
Lipow expects oil to hit the $30s but not for long. "I think you could have a cup of coffee in the $30s, but I'm not in the camp that thinks oil goes to its 2008 low of $32.40," he said.
Certainly the refining maintenance season is just one of many factors that could impact the market, but it is an established event unlike some of the other things that combined to drive prices lower. A big factor has been OPEC, which decided last year to end production quotas and to allow the market to set prices.
Since then, Iraq has ramped up a surprising amount of new production while Saudi Arabia has pumped at higher-than-normal levels. Iran also stands to come back on the market with hundreds of thousands of barrels a day that were taken off the market by sanctions against its nuclear program.
Just Tuesday, OPEC upped its forecast for oil supply from nonmember countries in 2015. Production increased by about 600,000 barrels a day in the U.S. this year. Typically, the shock of falling prices shakes out producers that find it difficult to fund operations, but the U.S. industry has kept drilling.
OPEC has also been pumping more than it has in several years and reported a 2.87 million barrel a day global oversupply in the second quarter.
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