Why Oil Prices Haven’t Peaked Yet This Year
Oil prices peaked in June during the last two years, but this year is likely to be different.
$51.23: That's the highest closing price for West Texas Intermediate crude oil futures contracts this year, which was registered on June 8. Since then, prices for crude oil have fallen back modestly to last trade around $49.
Is this a minor pullback or the start of a larger downtrend for oil prices?
YTD Oil Prices
June Marked The Annual Peak In Last 2 Years
In the last few years, whether by coincidence or not, oil peaked in the month of June before starting a big descent. Last year, for example, prices reached a high for the year on June 10 at $61.43 and fell below $40 in August.
Oil In 2015
In 2014, prices reached an annual high of $107.26 on June 20 before cratering to less than $50 by the end of the year.
Oil In 2014
Oil Less Seasonal
For many commodities, seasonal effects can play a part in influencing where prices go during certain times of the year.
In the grain markets, corn and soybeans tend to rise through the first half of the year, peaking in early summer as crops are planted. Then they trend lower into the fall, when crops are harvested, giving the market a firm handle on how much supply will be available that season.
In the natural gas market, prices often peak in the summer during the cooling season and again in winter, during the heating season.
When it comes to the oil market, however, seasonality has become less of a factor in recent years. The U.S. summer driving season―once a major driver of seasonal price trends―doesn't move the market like it once did.
That's because the oil market has become increasingly global in the past decade, with the U.S. representing an ever-shrinking share of total demand.
Pattern Likely To Break
Because of that, it's hard to conclude that the pattern in the last few years, with oil peaking in June, is anything but a coincidence.
In fact, fundamental factors suggest that, this year, that pattern may break. According to the International Energy Agency, the oil market will be balanced in the second half of 2016 thanks to robust demand and sinking supply.
Global demand in the first quarter grew by 1.6 million barrels per day, compared with an initial estimate of 1.3 million barrels per day, wrote the IEA in a recent report.
Separately, fresh data from the Energy Information Administration Wednesday revealed that U.S. oil production fell to 8.6 million barrels per day last week, down more than 50,000 barrels per day week-over-week and 1 million barrels per day from its highs.
U.S. Oil Production (thousand barrels per day)
These fundamental factors make the oil market today much different from the oil market of last year or the year before, when prices plunged after reaching a peak in June.
If these trends keep up―and if the recent “Brexit” surprise doesn't lead to an unexpected economic downturn―oil is likely to make new highs later this year to encourage U.S. producers to drill again and help stop the steep slide in the country's output.
Contact Sumit Roy at [email protected].
