In the week since our last edition of What’s Affecting Oil Prices, Brent prices softened slightly to average $69.15/bbl falling slightly through the end of the week on a stronger dollar and reports of higher U.S. production. The high level of enthusiasm continues to concern analysts, and they expects traders to become increasingly uneasy about the direction of U.S. shale production and begin closing out positions. 

For the upcoming week, Stratas Advisors expect Brent prices to continue to expect crude to fall, preferably slowly, with prices averaging $68/bbl as the Brent/West Texas Intermediate (WTI) differential remains around $4/bbl, but the risk of a sharp downward correction remains.

Geopolitical: Neutral

There is minimal news on the geopolitical front that is likely to influence prices this week. While perennial issues, such as the decline in Venezuela and unrest in Libya, remain analysts do not expect them to become more impactful in the short term.

Dollar: Positive

The stronger correlation seen between crude and the dollar held last week as a strong jobs number lifted the dollar and temporarily dinged oil. However, the ill-effects were overcome by the end of the day. With no major data releases on the horizon Stratas expects the dollar will go back to slowly weakening, lending support to oil.

Trader Sentiment: Positive

The market remains incredibly bullish on prices seemingly across the board. The past week saw managed money net longs for both Brent and WTI fall, although levels remain generally elevated. Stratas continues to express concerns that the market is overbought, and expects traders to begin some form of pullback in the short term. Given the preponderance of managed money in current positioning, analysts fear that a pullback, when it happens, will be swift.

Supply: Negative

Signs of a rapid increase in U.S. drilling activity continue to develop. Last week the number of operating oil rigs in the U.S. rose by six. U.S. oil rigs now stand at 765 compared to 583 a year ago. For the first time in 47 years, U.S. production was reported to have come in above 10 MMb/d in November 2017. In the week ahead the knowledge that U.S. producers are over 10 MMb/d and still adding rigs, combined with the inevitable upward revision to U.S. crude supply in the EIA weekly report, will weigh on prices.  

Demand: Neutral

Despite seeing some pullback in diesel demand, U.S. consumption of petroleum products remains generally stable. With weather continuing to fluctuate throughout the U.S., Stratas analysts do not see this as providing a clear market signal in terms of overall demand, and as such is not likely to impact prices this week.

Refining: Neutral

Global refining margins rose again last week, and are likely to provide support for crude demand. However, crude runs, especially in the U.S., are likely to continue to fall seasonally as refiners undergo maintenance.