Our Short-Term Price Outlook service covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.
For the previous week we expected the price of Brent crude oil would trade within the range of $49.50 and $47.00 with support being provided by demand growth and favorable refining margins outweighing the downward pressure from the strengthening dollar and the cautious behavior of oil traders. During the week the price of Brent crude oil started at $47.42 and stayed above $47.00 until Wednesday when API reported that inventories of crude oil in the U.S. had increased significantly during the previous week. The price of Brent crude oil continued to drop when the EIA inventory report released on Thursday confirmed a substantial build in the inventories of crude oil (4.2 million barrels) ending the week at $43.61.
For the upcoming week we are expecting that the price of Brent crude oil will test the low of $42.69 experienced on August 24 of this year. The following is a summary of the supporting rationale:
● The recent terrorist attack in Paris reinforces our view that geopolitical risks are increasing. including the increasing potential for a wider sectarian conflict in the Middle East. As pointed out by our geopolitical team, the situation in the Middle East is further complicated by the presence of Russia. Russia’s decision to engage in direct military intervention in Syria at the end of September 2015 was motivated by a desire to shore up its last client state in the region and maintain access to its naval facility there, which provides it with an outlet to the Mediterranean Sea. The Middle East is not the only risk associated with Russia. Another potential risk pertains to a NATO-Russia conflict, which based on our geopolitical team’s assessment of Putin’s policy toward ethnic Russian populations views Latvia and Estonia as being at particular risk of Russian aggression. In 2014, Russian air and naval forces conducted more than 250 demonstrations of force capability along Latvia’s borders—a 500% increase from 2013. Ukraine is another potential risk. A report from the British House of Commons defense committee states that Russia could deploy 150,000 troops to Ukraine in 72 hours, while NATO would currently require six months to match this force. With the increasingly prominence of geopolitical developments, we are shifting our view of geopolitics from a neutral factor to a positive factor with respect to the price of Brent crude.
● At the beginning of last week we expected that there would be further strengthening of the U.S. dollar, in part because the net long positions with respect to the U.S. dollar had increased to the highest level since the beginning of August while the net short positions with respect to the euro increased. During the week the U.S. dollar, with respect to the euro, stayed essentially stable, starting the week at 1.074 and closing the week at 1.078. As pointed out by our macroeconomics team, the latest jobs reports are increasingly betting on a higher likelihood of a hike this year with the markets pricing in a 70% likelihood into the December 2015 contract. However, as noted in the team’s update on the U.S. economy, a December hike might be premature for the following three reasons. First, a December hike could adversely impact consumer confidence and discourage consumption at a particularly important time of year for the retail sector (the risk is highlighted by retail sales in the U.S. falling short of expectations for October stemming, in part, from an unexpected decline in automotive sales). Second, such a hike would stoke more dollar strength, thus acting as a stronger headwind to US exports. Third, commodity weakness aside, core inflation is still running well below target. Wage softness casts doubt as to whether there is sufficient labor market tightness to generate wage-induced inflationary pressures. For the upcoming week we are expecting that U.S dollar will strengthen because of the heightened concerns about geopolitics and the potential impact on economic growth in Europe. Consequently, we are maintaining our view that the U.S. dollar from a neutral factor to a negative factor with respect to the price of Brent crude oil.
● The latest data indicates that traders of Brent crude oil have slowed down their increases of short positions with the number of short positions remaining essentially flat during the previous week. However, the number of long positions increase by less than 7,000 positions. The sentiment of traders of WTI was more bullish with a drop in short positions of more than 17,000 positions while long positions increased by more than 13,000 positions. For the upcoming week we are expecting that oil traders will have a cautious mindset because of concerns about downside risks. These concerns are highlighted by the increase in the number of options for selling WTI at prices at and below $40 that has occurred during the last month. Consequently, we are maintaining our view that the sentiment of the oil traders is a neutral factor with respect to the price of Brent crude oil.
● Somewhat surprising is that the number of operating oil rigs, as reported by Baker Hughes, increased last week by an addition of two rigs ─ ending the streak of 10 straight weeks of declines. On the other hand, the backlog of wells that have been drilled, but not hydraulically fractured, reached 1,000 in North Dakota. The backlog is consistent with production from North Dakota waning, as indicated by daily output falling by 2 percent in September. The backlog of drilled wells, however, is also an indication of the ability of U.S. producers to ramp up production quickly when oil prices tick upward. Furthermore, U.S. production is remaining stable at around 9.2 million barrels, as reported last week by the EIA. While it appears that OPEC production fell in October by more than 100,000 barrels per day, production from OPEC remains near the peak levels seen in July. Furthermore, exports from Iraq (including exports to the U.S) are expected to increase during November. As such, we are maintaining our view that the market will continue to perceive supply as a negative factor with respect to the price of Brent crude oil.
● Demand in the U.S. continues to be strong as indicated by the level of product being supplied to the market. Last week the EIA reported that gasoline supplied to the market was 383,000 barrels per day higher than for the same period of the previous year. The supply of middle distillates (jet fuel/kerosene and distillate fuel oil) was 59,000 barrels per day higher. From a global perspective inventories of products declined last week in the region of Antwerp, Rotterdam, and Amsterdam (ARA) and Singapore, which experienced a significant decline in middle distillates. There are also signs that global demand will be getting stronger in the future. The global PMI for October increased to 51.4 in comparison to 50.7 for September. The increase is the largest gain in two years, and for the first time since March the global PMI moved above its three-month moving average. Therefore, we are maintaining our view that demand will be a positive factor with respect to the price of Brent crude oil.
● Last week refining margins strengthened substantially in Northwest Europe and Singapore with improving distillate crack spreads. Refining margins in the USGC were stable last week, but still remain well above the normal range for this time of year. Support for refining margins stems from the robust demand and the decline in product inventories, as noted above. Consequently, we are maintaining our view that refining margins will be a positive factor with respect to the price of Brent crude oil.
Last week, we expected another build in inventories of crude oil – but only in the range of 500,000 and 1,000,000 barrels with both refining utilization and crude imports increasing. The build in the inventories of crude oil actually increased by 4.2 million barrels with a major increase in imports. The level of crude imports increased to 7.38 million barrels per day, which was 434,000 barrels per day more than imports of the previous week. The Brent-WTI differential, which started the week at $3.13, narrowed to a low of $2.31 before closing the week at $2.47. The narrowing of the Brent-WTI differential stems mainly from the downward pressure on the price of Brent crude oil. For the upcoming week we are expecting another build in inventories of crude oil in the range of 2.0 and 2.5 million barrels. Additionally, we are expecting the differential to remain between $2.00 and $2.50.
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