What’s Affecting Oil Prices This Week? (Aug. 16, 2021)

[Editor’s note: This report is an excerpt from the Stratas Advisors weekly Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.]

The price of Brent crude ended the week at $70.25 after closing the previous week at $70.49. Price movements were bumpy with the price of Brent crude reaching a low of $69.04 and a high of $71.44. The price of WTI crude ended the week at $68.03 after closing the previous week at $67.84, and after exhibiting the same bumpiness as Brent crude.

Since early July of this year, oil prices have dropped below the upward trend that had been in place since early November 2020, and for the upcoming week, we are expecting more downward pressure. However, there remains support at $70 for Brent crude and $66 for WTI crude.

The downside risks associated with the oil price stems from demand-related factors, and much less so from supply-side factors. While OPEC+ is forecasted to increase supply in alignment with the recent agreement, we continue to hold to our view that Iran supply will remain constrained by the U.S.-led sanctions, and that a new Iran nuclear deal that would remove the sanctions is not on the horizon. The oil rig count in the U.S. increased by 10 rigs from the previous week with Texas adding three rigs and New Mexico adding four rigs. The increase is the largest weekly increase since the first week of April of this year. The U.S. oil rig count now stands at 397, in comparison to the pre-COVID level of 683, which occurred during the week of March 13, 2020. However, we are expecting that U.S. production will only average 420,000 bbl/d more in the second half of the year than in the first half of the year.

While we think there is limited risk associated with supply surprising to the upside, there is much more risk associated with demand surprising to the downside.

• From a global standpoint, cases of COVID-19 appear to be reaching a plateau with the increase in cases over the last 14 days slowing to 8%. Deaths are also showing a similar pattern with the increase in deaths over the last 14 days slowing to 5%. As has been the situation since the beginning of the pandemic, the COVID dynamics differ across regions with cases continuing to increase in Africa, Asia, and especially in North America, while cases are declining in Europe, Middle East, and Latin America.
• The risk associated with the U.S., however, is becoming increasingly more evident with cases, hospitalizations and deaths continuing to accelerate. If the U.S. does not see a plateau in the next 3-5 weeks—and then a decline, the U.S. will be heading into the winter months already at very elevated levels of cases, hospitalizations and deaths. Additionally, this situation will be occurring when most of the vaccinated population will be reaching or already surpassed the time-period of optimal effectiveness of the vaccines. The importance of the U.S. is illustrated by the U.S. representing about 33% of the total forecasted oil demand growth for the second half of the year.
• China has also been experiencing an uptick in COVID-19 cases, and has responded by canceling large public events, and taking other aggressive steps including widespread testing, lockdowns of neighborhoods, and mobility restrictions. These steps seem to be effective with China reporting recent declines in cases. However, the slowing of the Chinese economy remains a risk with recent forward-looking economic indicators showing weakness.

In addition to the COVID and economic developments affecting demand, there were some interesting geopolitical developments last week, including the takeover of Afghanistan, that we discuss further in the full report.

About the Author:

John E. Paise, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.