[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.]

For several weeks, Stratas Advisors has been highlighting the downside risk stemming from the reemergence of COVID-19, along with other factors, including a strengthening U.S. dollar—and last week we saw the market react to these risk factors. 

The price of Brent crude ended the week at $70.49 after closing the previous week at $75.41. The price of WTI crude ended the week at $67.84 after closing the previous week at $73.95. Additionally, traders of WTI decreased their net long positions by reducing their long positions, and to a lesser extent, increasing their short positions. The net long positions are now at the lowest level since September of 2020.

Additionally, since June 22 of this year, when net long positions were nearly at the recent high seen during the week of February 16, net long positions have declined by some 30%. Traders of Brent also decreased their net long positions, but much less so than traders of WTI.

Will the support for oil prices hold or will prices continue to drop? Well, the news about COVID-19 is certainly not getting better.

The average number of daily cases in the U.S. has reached 108,723, which is the highest level since February of this year. Hospitalizations are also increasing—by 84% over the last 14 days—and now are averaging 57,873. The good news is that deaths are remaining relatively low at 504, but have increased by 89%.

The U.K. has had a sharp decline in cases, which have declined by 34% in the last two weeks. However, cases are at 20 times the number of cases of one year ago. Additionally, the number of deaths has increased by 40%—and as a percentage of cases are twice the rate of one year ago.

Japan is now experiencing the highest level of cases since the pandemic started, but deaths remain low—even though only 33% are fully vaccinated

The supply/demand fundamentals still look favorable with supply increases being outpaced by demand increases. And even if some restrictions on mobility and economic activity are imposed again, Stratas analysts are expecting that demand growth for third-quarter will only be reduced by around 200,000 barrels per day (bbl/d), and that inventories of crude oil would still decline through the rest of the year.

Additionally, OPEC+ has the option to moderate future supply increases, and the potential of additional barrels coming onto the market from Iran seems to be becoming more remote. There is also the possibility that countries, including the U.S., could have a spike in cases that last only around six to eight weeks and then have a steep decline—similar to the experience of U.K. and India (which did so with limited impact from the vaccine). Conversely, there are signs that China’s economic growth is weakening, which in turn, will have a negative effect on other economies of Asia.

With consideration of the key factors affecting oil prices, Stratas Advisors expect that for this week oil prices will slide further, and that the market will require some positive news before rebounding.

WAOp

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.

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