This Saturday marks the official start of summer. Oil consumption and production experience typical seasonal patterns that traders, producers and consumers expect and plan for. However, this summer will be distinctly different as markets grapple with changes wrought by the coronavirus pandemic and economic dislocation.
Here are five things to watch in this atypical summer season:
1. OPEC+ Month-to-Month Production Reviews
OPEC+ is meeting again in July. OPEC+ normally convenes once during the summer to set production quotas for the second half of the year. This year, OPEC+ has caucused in March, April and June, and its actions—or failure to act—at each meeting impacted the markets.
The group intends to review its production policies on a month-to-month basis, meaning that in July it could decide to extend the current production quotas for another month. The same uncertainty could continue into August and beyond.
Will the group decide to make a longer-term deal or will it continue with month-to-month decisions for the rest of the summer? There are rumblings among some OPEC+ countries that month-to-month agreements hurt their ability to plan their national budgets, so look for a push for an agreement closer to the traditional six months.
2. Depressed Travel Demand
There's usually a pick-up in travel during the summer, as people take vacations, especially in North America and Europe. The past several years saw a rise in air travel in the summer as well. In fact, during the summer of 2019 a new record was hit in terms of the number of people who passed through U.S. airports—a lift of 3.4% from the summer or 2018.
Summer jet fuel consumption has traditionally been elevated, but this summer we should expect to see depressed numbers, as global travel is hobbled by closures and fears of coronavirus. While there may be an uptick in car travel as families opt to drive to vacation spots instead of fly, this growth may not be noticeable in terms of gasoline demand since families experiencing economic hardship are likely to forgo travel and vacations altogether.
In addition, conferences, conventions and many sporting events—including the Olympics—have been canceled, eliminating these sources of travel throughout the summer months.
3. More Saudi Oil Diverted For Domestic Energy Use
In Saudi Arabia, electricity demands typically increase during the summer. Recently, the nation has been able to use more natural gas for electricity than oil. Saudi Arabia’s natural gas is almost entirely associated gas, which is produced as a byproduct of crude oil production. Lower crude oil production means less natural gas for Saudi Arabia, and that natural gas is important for both electricity and petrochemical needs.
But with crude oil demand significantly lower than normal, it is possible Saudi Arabia may decide to burn more crude oil for domestic electricity this summer instead of diverting natural gas needed for petrochemical production.
4. Uncertainty About Opening Economies
Many areas are still locked down or under significant economic restrictions. These include global economic and cultural centers like New York City and Beijing. We have seen that openings give an immediate bump to economic activity and oil demand over the last month and a half, but we don’t yet know when remaining jurisdictions will open. Opening economies could boost demand in ways that are different from what we normally see this time of year, but we must wait for news of when these openings will come.
5. Pressure On Summer Plans?
Summer tends to be a slower period for big business but a busy time for leisure activities. While many Americans typically vacation in the first week of July, in other parts of the world, like western Europe, August is usually the month to take a holiday. However, the question remains if the changed circumstances will impact summer plans in 2020.
The global economy is in the middle of serious dislocation. With many leisure activities closed and businesses struggling to make up for lost revenue, will the summer months be more like any other time of the year? Or do people need a vacation to recover from the stress of the pandemic?