Why oil price may remain down despite efforts to resuscitate it

Crude oil prices have continued to rally around $40 per barrel despite efforts by oil producers, including Nigeria and other members of Organization of Petroleum Exporting Countries (OPEC) to resuscitate the prices.

According to Oilprice.com, refining maintenance season is a few weeks away, a period of time that could be hugely negative for oil prices. Already the oil markets are dealing with record levels of oil and petroleum products sitting in storage, but a refining lull would put a major dent in oil demand. While the maintenance season is temporary, it could keep oil prices low for the next several months.

Between the months of July and October, purchases of crude oil from the refining industry in the U.S. has declined by roughly 1.2 million barrels per day over the past five years.

“People are looking ahead to the fall and are worried. There’s more and more talk of prices going south of $40 and as a result people are going short,” Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg in an interview.

“Gasoline inventories remain at extraordinary high levels, only down slightly from record highs. Several weeks of increases in the level of gasoline sitting in storage has weighed on the markets. Worse, the high inventories come at a time when oil traders expected them to fall because of summer driving season. Unfortunately for oil bulls, they have not,” he said.

Crude oil inventories have declined for about 10 consecutive weeks, but still are extremely high. And the drawdowns could come to an end, or at least narrow, if refiners cut back on purchases during maintenance season.

That is all bearish news for oil prices in the near-term, and the markets are starting to take notice. Hedge funds and money managers have cut their bets on rising oil prices and increased their short bets. Net-long positions are at their lowest level since March.

Meanwhile, as downturn continues to hold sway in the international crude oil market, oil majors are also counting their losses as refining boom halts. British Petroleum, the first oil major to announce the lowest refining margins for the April to June period in the past six years. The global refining marker margin, which stood at $13.80 a barrel in the second quarter of this year, has dropped down to $10.70 a barrel in the third quarter to date. Last year, the third quarter margins were a healthy $20 a barrel.

This news doesn’t bode well for the large oil companies, which now have to deal with lower crude oil prices and lower refining margins. The upstream business, the business of exploring for reserves and production, had taken a huge hit due to the massive drop in crude oil prices. Consider ExxonMobil, the only company among the five oil majors, which has a profitable upstream business. Its upstream net income, which was $27 billion in 2014, shrank to $7 billion in 2015.

On the other hand, all the oil majors reported a spurt in downstream margins since 2014, which seems to be waning. “The crash in oil prices in late 2014 brought refineries worldwide a pleasant surprise: booming margins. But now, the market is changing,” said Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd. in London.

In the latest quarter, BP has seen its downstream earnings drop to $1.51 billion from $1.87 last year, and $1.81 billion in the first quarter of this year. What is more concerning is that BP expects margins to remain “under significant pressure.

High gasoline demand in late 2015 and early 2016 absorbed the increased refining by the oil companies. Healthy refining margins also helped the oil companies survive the sharp drop in crude oil prices in the first quarter of 2016.

Nigeria’s crude output nosedived drastically in the wake of incessant militant attacks on oil installations in the Niger Delta region. Production went as low as 900,000 barrels per day from 2.2 million barrels per day production. However, peace seems to have returned to the creeks as the Federal Government engages some representatives of the militants in dialogue. Nigeria’s oil production now average 1.4million barrels per day.

Nigeria’s crude oil production has declined massively from an average of 2.2 million barrels per day last year to about 1.4 million barrels per day due to increased vandalism of crude oil pipelines by vandals.

The Minister of State for Petroleum Resources, Ibe Kachikwu, said the incessant attacks on oil installations in the Niger Delta region impacted negatively on the estimates in the recently approved 2016 budget, which pegged oil production at 2.2 million barrels per day.

He, however, expressed government’s commitment to ensure that destroyed facilities were repaired and effectively protected from further damage. “We are going to work hard to see how we will get these issues resolved and get our production back,’’ the minister said, pointing out that developing infrastructure was key to promoting increased crude oil production and efficiency.

The minister said there were still a lot more things government needed to pay attention to, particularly infrastructure development, which he said the country has not been able to invest in over the last 20 years in the oil sector.