[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.]

Two opposing sides were able to reach a compromise last week, in which the increase in oil production by OPEC, Russia and allies, a group known as OPEC+, in January will be limited to 500,000 bbl/d. Further increases, similar in nature, will be considered in subsequent months and will be dependent on the prevailing market conditions. The foregoing of the 2 million bbl/d increase was expected by Stratas Advisors since September, in part, because the market conditions did not support an increase in crude oil supply of that magnitude.

What Is Affecting Oil Prices the Week of December 7, 2020? Infographic

Global Supply—Positive

U.S. crude oil production is still hovering 11.1 million bbl/d level, a level that U.S. oil production has been (+/- 500,000 bbl/d) at for the last six months. The fact that oil production in the U.S. has not increased beyond this level is a positive factor for oil prices.

For the upcoming week, we see this variable continuing to being positive for oil prices.

Geopolitics—Neutral

After the assassination of its top nuclear scientist Iran employed only some harsh rhetoric. However, Iran will continue to be a potential threat to the stability of the Middle East, and the saga of U.S.-Iran negotiations will remain a feature of geopolitics.

For this week, we expect geopolitics will be a neutral factor for oil prices.

Economy—Positive

The positive news about the advent of vaccines is still a source of optimism for markets. However, there are growing concerns about the U.S. labor market. While last week’s U.S. jobless claims report indicated a reduction in claims, after the increases of the previous two weeks, the jobs report for November was disappointing with only 245,000 jobs being added.

For the upcoming week, we expect this variable to be a positive factor for oil prices.

Oil Demand—Neutral

Out of the three major markets in the world, Europe is going through one of the most difficult periods regarding COVID-related restrictions. However, consumption in both Asia and the Americas continue to underpin refining utilization rates and crude demand.

For the upcoming week, we expect this variable will be a neutral factor for oil prices.

Refining Sector—Neutral

One of the main consequences of stronger crude prices is the negative impact it has on refining margins when product prices are not increasing at the same pace as crude.

Refining margins in both Asia and the U.S. showed more resiliency with last week’s crude price strength, holding relatively stable levels over the last 10 days.

For the upcoming week, we expect this variable will be a neutral factor for oil prices.

Oil Trader Sentiment—Positive

Thanks to the recent news of successful vaccine results, both managed nets widened last week, which means there are more long positions with respect to shorts, a sign of more traders willing to hold on to their contracts for a potential price upside in the short term.

For the upcoming week, we expect that this variable will be positive for oil prices.

About the Author:

Jaime Brito is vice president at Stratas Advisors with over 24 years of experience on refining economics and market strategies for the oil industry. He is responsible for managing the refining and crude-related services, as well as completing consulting.

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