What’s Affecting Oil Prices This Week? (Aug. 23, 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.]

In last week’s note we highlighted that there was significant downside risk to oil prices stemming from the rebound in COVID-19 cases and slowing economic growth—including China’s economic growth. We also highlighted that while oil prices have dropped below the upward trend that had been in place since early November of 2020, there was some support at around $70.00 for Brent crude and $66.00 for WTI crude. That support, however, did not hold with the price of Brent crude ending the week at $65.00 after closing the previous week at $70.25. The price of WTI crude ended the week at $62.25 after closing the previous week at $68.03.

Now where do oil prices go?

The risk to demand is continuing to increase with future demand associated with the two largest consuming countries—U.S. and China—looking less robust than it did at the beginning of July.

• The average number of daily cases in the U.S. has reached 144,169. One month ago, the number of cases was 12,499. At the current rate of increases, by mid-September, the number of cases will around 275,000, which will be the same level in January when cases previously peaked. The number of daily deaths is now back up to 1,007, which compares to 186 one month ago. At the current trend deaths will reach around 1,820—about half of the peak in January. However, at the current trends, the number of hospitalizations will be around 160,000, which would exceed the level of January when hospitalizations were around 135,000. The optimistic scenario is the cases, hospitalizations, and deaths peak in the first half of September and decline rapidly in the following month (in similar fashion to India). If not, the U.S. will be entering the colder weather months with very elevated levels of cases, hospitalizations, and deaths. Additionally, while the U.S. is planning on starting the third round of vaccines for people at higher risk in September, early data coming out of Israel pertaining to the effectiveness and the risks associated with the third round do not seem very promising. With cases, hospitalizations and deaths going up there will be increasing pressure to do something. Additionally, more people will reduce their activities on their own volition. While Americans are still driving, and gasoline demand is holding up well, demand is starting to be affected on the margins with events moving back to virtual and return-to-office policies being delayed. With the current COVID-19 trends it is now very likely that there will be a material impact on gasoline demand in the coming weeks.
• China’s economic growth has been slowing down and the forward-looking indicators are pointing to further slowing. Additionally, while China has relatively few cases of COVID-19, China continues to be aggressive in addressing any upticks, which is resulting in some negative impact on travel (air and road) and freight movement between provinces. Another negative impact on oil prices is that is that China has been reducing its crude imports as oil prices started moving up, in contrast to last year, when China increased imports to take advantage of low prices to stockpile crude oil.

There are factors that will provide support for oil prices.

• While there are growing expectations that the U.S. Federal Reserve will soon announce plans to start tapering its monthly purchases of $120 billion in government debt, we do not think the U.S. Fed Chairman—Jay Powell—will make any such announcements during his speech scheduled for Aug. 27. Nor do we think the Fed will make any such announcement after its September meeting. Instead, we think there are enough signs pointing to a weakening recovery—including the recent significant drop in consumer confidence—coupled with the ongoing concerns about COVID-19 cases that will push the Fed to stay pat. At this time, there seems to much more potential risk than benefits associated with the Fed moving away from its accommodating monetary policies. The extension of the accommodating monetary policies, coupled with the slowing economic growth in the U.S. will moderate the strength of the U.S. dollar, which in turn, will provide some support to oil prices.
• There are some signs that OPEC+ is contemplating the slowdown of the scheduled increases in supply with growing concerns about weakening demand. The ability of OPEC+ to adjust supply to align with demand is one reason for our previous view (in June) that prices would trade in a relatively narrow channel for the rest of the year. While OPEC+ will be reluctant to stretch out the scheduled increases in supply, it will be more comfortable doing so, if OPEC+ does not think it will forego market share. We believe that Iran will continue to be hindered by U.S. sanctions, the remaining risk stems from the U.S.—and the risk of the U.S. ramping up production seems very low at this time. As such, we think that, if necessary to stabilize oil prices, OPEC+ will reduce the pace of supply increases—even with pressure from the Biden Administration to increase supply to push down prices.

Looking at both upside and downside factors—we still think there is more downside than upside at this time. There is support for the price of Brent at the $63-65 range—however, this level will not hold if the COVID-19 situation in the U.S. is still worsening in mid-September—and OPEC+ continues with its current scheduled pace of supply increases.

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.