As we expected, crude prices continued going up last week. The price of Brent crude ended the week at $79.24 after closing the previous week at $77.20. The price of ended the week at $75.25 after closing the previous week at $73.95.
The price of Brent crude is edging closer to levels not seen since September of 2018, when the price of Brent reached $82.73 (before quickly falling to $53.80 by December 1, 2018). The price of WTI has already exceeded the price during that period in 2018, when WTI reached $74.34 before declining to $45.41 by December 1, 2018. The decline in prices stemmed, in part, from the significant increase in US production that occurred over the course of the year (in January, 2018, US production was 9.5 million b/d and by the end of the year had reached 11.7 million b/d – with the increase in production from September 1 through December 1 alone being 700,000 b/d) coupled with the increase in US crude inventories, which increased by some 48 million barrels during the period of September 1, 2018 to December 1, 2018.
The increase in prices week was not unexpected with traders becoming more bullish as the world moves past the latest wave of COVID-19. Traders of WTI increased their long positions, while their short positions were essentially unchanged. For the fifth straight week, traders of Brent crude increased their net long positions with the increase in their long positions outpacing the increase in short positions. During these five weeks, traders of Brent crude have increased their net long positions by around 28%.
Additionally, there were no negative surprises with the US avoiding a government shutdown by passing a stopgap funding bill, which will keep the US Federal Government funded through December 3, 2021, and China taking steps to avoid widespread fallout from debt issue pertaining to Evergrande, the second largest property developer in China.
For the upcoming week, there is plenty of news that will affect the oil price.
- Of most importance will be the outcome from the OPEC+ meeting. We are expecting that OPEC+ will not announce at this meeting any changes to its current plans of increasing supply by 400,000 b/d over the next several months, but will wait for further evidence that global economy and oil demand are back on the path of more reliable growth, which warrants further supply increases.
- Another significant datapoint to watch for is the upcoming jobs report for September, which is to be released on this upcoming Friday – especially given the disappointing jobs report for August, which indicated that the US added only 235,000 jobs, when the market was expecting something in the range of 750,000 jobs. Another disappointing jobs number would cause the Federal Reserve to be more cautious about making any changes to its current accommodating monetary policies, including reducing its assets purchases of $120 billion per month. We do not expect another major miss with the jobs support and that the number of jobs being added will align closer with the consensus expectations of 475,000 new jobs being added in September. A favorable jobs report will provide additional support for the US dollar, which will help constrain the increase in oil prices.
For 4Q of this year, we are still expecting oil demand to be more than 1.0 million b/d less than in 4Q of 2019. There have been some concerns voiced that there will be increased oil demand this winter stemming from power producers and industrial users shifting to oil and away from natural gas and coal because of high prices and shortages. There are signs that this shifting is already occurring in some parts of South Asia and the Middle East. While it is likely that some shifting will occur, we think the impact will be marginal. From a global standpoint, oil demand associated with power generation is around 1.2 million b/d and with respect to China, oil demand associated with power generation is about 20,000 b/d. Additionally, inventories of fuel oil are below typical levels, which means that as demand picks up, prices will also increase, thus making it less attractive to shift toward fuel oil. The more important outcome of high natural gas and coal prices will be the restrictions on power usage and power outages – and reduced economic activity.