Oil prices have been falling since the New Year. After a bullish announcement from the Organization of Petroleum Exporting Countries and production cuts by non-OPEC nations, the narrative has become bearish, focused on drilling for U.S. shale oil, as well as the failure of some nations to observe calls to cut output.
Yet market participants are missing something fundamental: WTI futures and energy equities have not priced in the potential upside risks to oil prices during the 2017 U.S. summer driving season, which is likely to be record-breaking. And that season — roughly the period between late May and early September — is approaching on the New York Mercantile Exchange much more quickly than it is in real time. NYMEX contracts trade ahead of the calendar, so higher prices may be closer than they appear.
While it may be only the third week of January, March crude oil contracts on the NYMEX become the new trading benchmark when February contracts expire on Jan. 20. This shift puts refineries, hedgers and traders one month closer to the high-demand summer, the biggest seasonal driver of global oil prices of the year. Because of the timing of NYMEX contract trading changes, refiners are likely to significantly increase their oil hedging and purchasing when April crude oil contracts on the NYMEX become the trading benchmark on Feb. 21. That means upside surprises to oil prices in 2017 may be only a month away.
This year, the seasonal upside could be even greater than normal. With the lowest U.S. unemployment rate since before the recession of 2008, and two consecutive years of record SUV and light truck sales in 2015 and 2016, the coming summer driving season is likely to show records for miles driven and gasoline demand. In fact, there has been a record number of miles driven every month since December 2014. And a continued trend higher in the 12-month moving total of U.S. miles driven is likely to continue throughout 2017.
Although there are upside price risks to WTI crude oil prices when the NYMEX contract rolls to April on Feb. 21, there are downside risks for oil prices when the summer driving season ends on the NYMEX. Just as the summer starts early on the NYMEX, it has a premature end, too: September WTI crude oil becomes the benchmark after the contract roll on July 20. Significant price declines accompanied similar contract rolls signaling an end to the summer driving season in 2014, 2015 and 2016 — though some of the downside risks in 2016 were mitigated by anticipated OPEC oil production cuts.
With upside risks to global and U.S. growth in the second half of 2017, the story is likely to be different this year. Oil prices are likely to find more support — with or without OPEC compliance — even after the coming driving season ends, with a potential for the smallest post-driving season price declines on the NYMEX since 2013.
Oil traders watch a number of technical trading indicators, including moving averages, trading volumes and relative strength. These technicals are somewhat mixed for WTI crude oil prices. In addition, fundamentals are being unduly influenced by concerns about higher rig counts and the lack of compliance by OPEC oil production cut compliance. But upside risks to NYMEX WTI prices are increasing with each contract roll that brings the driving season closer. That driving season will dominate the headlines, support price increases engendered by fundamental demand and trigger additional technical buy signals. These factors are likely to send oil prices significantly higher ahead of and during the summer — even if it is tough to imagine now, in the dead of winter.