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Why WTI Could Crash In The Coming Weeks

West Texas Intermediate could drop to US$65 a barrel later this year on the back of extra maintenance work at U.S. refineries, Tom Kloza from the Oil Price Information Service has warned. Speaking on CNBC, Kloza said this maintenance season was the last chance for many refineries to hop on the new bunker fuel train by boosting their capacity for low-sulfur diesel and fuel oil.

"The next six to seven weeks we're going to see demand for crude drop by about 1 to 1.5 million barrels a day. It's refinery maintenance season," Kloza said.

The new bunker fuel emission rules, effective from 2020, stipulate that only vessels using fuels with sulfur content of 0.5 percent or less will be allowed to roam the oceans. The change is part of the International Maritime Organization’s strategy to cut carbon emissions from maritime transport by half by 2050.

The change has been touted as beneficial for refiners that are equipped to produce low-sulfur fuel oil and diesel, as well as LNG producers. Yet the adjustment will take time, and during this time demand for crude will be lower. How serious the effect on WTI prices will be remains to be seen, however.

For starters, many of those following WTI must have already factored in maintenance season and winter as weakening demand press down on prices. True, Kloza’s comment that this maintenance season will have a more severe impact on prices makes sense, but this additional maintenance should not come as a surprise to market watchers: there has been a lot of coverage about the IMO fuel rules and there’s likely to be even more in the run-up to its entry into effect. Related: Diesel Demand Is Set To Soar

Another thing that could curb the downside effect on maintenance season is hurricane season: Florence has hit demand for oil products but, one analyst told Market Watch, there will be demand destruction in the short term, but a surge in demand in a few weeks when [the region] starts to rebuild.” In other words, amid refinery season, rebuilding what Florence has damaged will apply counter pressure on prices, possibly curbing the decline.

Then there are the Iran sanctions, of course, the ace among bullish oil price factors that analysts and commentators have been waving in the market’s face since May. The United States is still trying to get its international allies to cut their imports of Iranian oil to zero even in the face of evidence that this will not be possible. The latest update in this respect suggests that there will be no waivers for countries that want to continue importing Iranian crude, even though earlier this year, senior Washington officials had said that waivers would be considered on a case-by-case basis.

So, in this context, the effect of additional refinery maintenance work on WTI prices could be limited, especially if the Iran-related signals from Washington continue in the same vein. Price trends have repeatedly demonstrated that benchmarks are equally strongly affected by fundamentals and geopolitical events that may or may not affect these fundamentals. As for Iran, there have been numerous assurances from OPEC and Russia that they will step up production to make up for lost Iranian crude. This should quell worry about supply, but it has not, so the upside potential for WTI remains as the U.S. benchmark tends to follow Brent, which will benefit from the sanctions even more: Kloza expects it at US$80 a barrel in the last quarter of the year.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry. More

Comments

  • Josephkutty - 18th Sep 2018 at 12:28am:
    This all sees like a game to increase the oil price. First it was North Korea and US tensions which was the news headlines worldwide, but then it became silent as they renewed their friendship and it seemed like nothing had happened. Then China trade wars and US - Iran political tension. First thing to note is that US and good relations with Iran till the fall of Saddam in Iraq and later nuclear deal tensions emerged and was agreed. Now the new idea is that US want to break the deal which they agreed/signed and want to impose sanctions against Iran (a major oil producer) to impact the oil supply worldwide especially with the major markets of Asia. Propagandists further make the world believe that the oil supply will be reduced and so the prices go up. Iran will be forced to sell oil in the black markets (why can't it be to US/close allies?) at the same or maybe at lower % of the market price. So when US/close allies oil supply start making up for the lost supplies, they benefit from an increased oil price and also the oil trade in US dollars keeps the value of USD currency strong. This has story for a potential Hollywood movie.
  • Eric M Staib - 18th Sep 2018 at 9:49am:
    "Crash" by $4? Clickbait headlines as usual.
  • DJDL - 18th Sep 2018 at 12:34pm:
    from $69 to $65 is not a crash.. fear mongering article.
  • Disgruntled - 19th Sep 2018 at 10:09am:
    Irina is a pro at this.
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