Normally, demand for crude oil and fuel drop off sharply after the first week of July. However, this year, demand for both gasoline and jet fuel has remained strong through August in the U.S. and Asia.   

Add in the fact that Saudi Arabia and Russia have now extended production cuts through the end of the year, and the current tight supplies of fuel (especially gasoline) should tighten further.

Still, there is a lot at play both domestically and globally. While China has seen a weakening in its manufacturing sector, travel demand has remained elevated, based on air and road traffic numbers. Meanwhile, as of the first week of September, U.S. storage levels of crude have dropped to nearly 16 MMbbl below the five-year average, with the NYMEX delivery point in Cushing, Oklahoma, storage dropping to a new yearly low.

So, why have U.S. crude oil rig counts continued to fall even with the steady increase in prices? The trend continues to reflect the “new” discipline that is being practiced by producers, in that higher interest rates and higher labor costs are now affecting drilling cost and moving break-even prices even higher out in the price curve. Therefore, even the latest strength in prices may not be enough to trigger a new drilling spree.

U.S. crude oil rig count
U.S. crude oil rig count and Cushing, Oklahoma, crude oil inventories. (Source: BOK Financial)

What could cause prices to weaken from here?

Looking forward, prices are overdue for a seasonal correction in demand, and I think it is coming. The big question will be how much seasonal pullback will be seen. If OPEC+, including Russia, continues to curb production and exports into 2024, and we continue to refill the Strategic Petroleum Reserve (SPR), then the pullback should be minimal and back month futures could be underpriced.  

However, if the U.S. Federal Reserve continues on its hawkish path of raising interest rates (which is still a good possibility), it could trigger a “demand fear” sell-off before new winter demand emerges. Another release out of the SPR is possible if prices escalate much further, and that, too, could lower prices.

And so, there are still a lot of unknowns. However, one thing is clear: price volatility should continue with us well into the end of the year.