Brent crude averaged $61.14/bbl last week, right in line with our forecast. Similarly, WTI behaved as expected, losing only $0.15/bbl to average $55.62/bbl. For the week ahead, we expect prices to rise and for Brent to average $62.50/bbl.
Markets are likely to continue building bullish positions on improved expectations for a US-China trade agreement. However, concentrated increases in bullish positions could lead to artificially higher bullish momentum, which would result in a sharper correction. Brent managed money net long positions have increased in recent weeks but remain well below five-year average levels. WTI managed money net longs have also increased and are hovering near five-year average levels as WTI benefits from greater bullish support.
Looking at fundamentals, product stocks in the US continue to drain on lower refinery utilization. Refining runs have likely reached a nadir and will increase in future weeks, drawing down crude stocks but leading to seasonal product builds. The real risk is Asian refined product stocks, which appear to be building on higher refining runs. Margins outside of the United States have been dropping and should force refiners to scale back run-rates.
Day-to-day in the week ahead prices will chase headlines about a US-China trade deal or an OPEC+ extension. While a deal will not be certain until it is signed, reports indicate that both sides have agreed on several major principles, and venues for an in-person meeting are being discussed. Stratas Advisors expects that a “Phase One” deal will be signed before the end of the year, but we caution that the deal will be far from complete and is unlikely to address any of the major sticking points between the two countries. While a deal postponing escalating tariffs and encouraging agriculture trade is certainly positive for the economy, it does not remove the tariffs already in place that are weighing on growth. After a brief boost from the initial agreement, market sentiment could sour heading into 2020 if no additional progress is made.
Geopolitical Unrest – Neutral
Global Economy – Positive
Oil Supply – Positive
Oil Demand – Negative