What’s Affecting Oil Prices This Week? (Aug. 30, 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 $71.67 after closing the previous week at $65.00. The price of WTI crude ended the week at $68.67 after closing the previous week at $62.25. With last week’s rebound, oil prices are back above the support levels of around $70.00 for Brent crude and $66.00 for WTI crude.

Oil prices are getting some support from a couple of short-term disruptions that are affecting the crude oil supply in the Gulf of Mexico. The development of Hurricane Ida has resulted in about a 90% reduction in crude oil production associated with the Gulf of Mexico, which translates into some 1.65 million bbl/d. The other incident pertains to the offshore explosion and fire involving PEMEX that occurred on Aug. 22, which has resulting production loss of some 440,000 bbl/d with most of the production still yet to return. Both events will continue to provide support for oil prices this week.

Additionally, there continue to be signs that OPEC+ is contemplating a slowdown of the scheduled increases in supply with growing concerns about weakening demand with the next OPEC+ meeting scheduled for Sept. 1. The ability of OPEC+ to adjust supply to align with demand is one reason for our view (first stated in early 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, and therefore, 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.

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Hurricane Ida Cuts Deep into US Oil Production, Gasoline Supplies

We have been highlighting for numerous weeks the increasing risk to oil demand associated with the rebounding cases of COVID-19. These risks remain, however, there are signs that the latest wave is rolling over. From a global standpoint, cases over the last 14 days declining by 1% (compared to 5% for the previous week). Deaths are also showing signs of plateauing with the increase in deaths over the last 14 days dropping to 1% (compared to 4% for the previous week). Cases in the Middle East and Latin America continue to decline, whiles cases in Asia and Africa are moving sideways, but at a relatively low level. Cases in Europe are also moving sideways but are starting to tick up slightly.

Most importantly cases in North America, are finally showing signs of plateauing—including cases in the U.S. The average number of daily cases in the U.S. has reached 156,145, which is an increase of 20% in the last 14 days; however, the rate of increase is slowing down. The same goes for hospitalizations, which have reached 99,272 and an increase of 25%, but the rate of increase is slowing down. The number of daily deaths is now averaging 1,281, which is an increase of 95% over the last 14 days. While the rate in the increase in death has not subsided yet—the slowdown in cases and hospitalizations are indications that deaths will also soon be slowing down. The bad news is that deaths are on track to approach 1,800—about half of the peak in January. Additionally, the number of hospitalizations could approach 160,000, which would exceed the level of January when hospitalizations were around 135,000. The good news is that if cases have now reached a plateau, it is possible that the number of cases in the U.S. will be back down around 50,000 or lower by the end of October, which is similar to the level of last year. The reduced level would place the U.S. in a much better position entering the winter. Then the next question will be the ability (or luck) of the U.S. to keep cases from returning to the all-time peak that was experienced last January. The likelihood of this happening will depend on the rollout and subsequent effectiveness of the vaccine boosters since the U.S. does not have the level of natural immunity required to prevent a rebound in cases that is associated with the winter months. Regardless, the world is not past COVID-19, and COVID-19 will continue to have an impact oil demand through at least the second quarter of 2022.

However, if the current wave is actually turning over, as indicated by the most recent data, the impact on oil demand will be marginal and the supply/demand fundamentals will be favorable for oil prices with supply increases being outpaced by demand increases (even with the reduction in demand growth) and inventories of crude oil will still decline through the rest of the year.

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.