As we expected, crude prices continued going up again last week. The price of Brent crude ended the week at $82.58 after closing the previous week at $79.24. The price of WTI ended the week at $79.59 after closing the previous week at $75.25.
Last week, we highlighted that the oil market would be affected by some major news items. One such news item was the latest US jobs report, which was released last Friday. This report was a surprise with the US adding only 194,000 and well below the consensus expectations of around 500,000. One of the contributors to the weak jobs report was the loss of 123,000 public-sector jobs, with local government education jobs declining by 144,000 – stemming from the lingering impact of COVID-19. The unemployment rate fell to 4.8%, but that was mainly the result of people leaving the labor force. Average hourly earnings increased on an annual basis by 4.6%. Given that the Fed Chairman has previously stated that he has seen enough evidence that the labor market has made significant progress, we do not think the September jobs report will have much influence on the Fed’s pending decision on when to reduce assets purchases of $120 billion per month. However, we are still holding to our view that any tapering will not happen until the next year.
Another news item of most importance was the outcome from the OPEC+ meeting. The decision was arrived at quickly and just shortly after we had posted our weekly note last Monday morning, which included our expectations that OPEC+ would not announce any changes to its current plans of increasing supply by 400,000 b/d per month but would wait for further evidence that global economy and oil demand are back on the path of more reliable demand growth. Our view remains that OPEC+ is comfortable with prices being around the $80 level but does not want prices to spike – nor does OPEC+ want to lose market share. As such, we think OPEC+ will adjust supply, when required, to achieve these goals.
Last week, the US Dollar Index remained essentially unchanged (94.1 vs. 94.07). The US Dollar Index has rebounded from a low of 92.03 at the beginning of September and is back on the upward trend that started in May of this year, when the US Dollar Index had fallen to 89.24. The increasing strength of the US dollar will put some downward pressure on oil prices. However, other factors, including supply/demand fundamentals remain supportive of oil prices – even with some concerns about demand – especially with Asia – because of the remaining restrictions pertaining to COVID-19 and energy shortages, which are negatively impacting economic activity in China and India. With consideration of these concerns, for 4Q, we are still forecasting the demand will outpace supply by slightly more than 2.00 million b/d and will represent the sixth straight quarter of inventory drawdowns. Nevertheless, crude inventories by the end of the year will remain above the pre-COVID level because of the significant build that occurred during 1Q20 and 2Q20.
The current price of Brent crude aligns with the upward trend that started last November and is about on par with the level last seen during September of 2018. After last week’s major increase in prices, we are expecting that price movements will moderate this week.