In the week since our last edition of What’s Affecting Oil Prices, Brent averaged $54.87/bbl, another healthy gain from the previous week. Bullish IEA and OPEC monthly oil reports, as well as ongoing recovery in the Gulf Coast, helped drive prices. For the week ahead, Stratas Advisors expects Brent to average $55/bbl as geopolitical tensions lend support and there is a surfeit of fundamental data that could weigh on prices.

For the upcoming week, Stratas Advisors is expecting crude stocks to build 2.6 million barrels. Stratas Advisors also expect the Brent-West Texas Intermediate (WTI) differential to average $5.50 as Brent remains strong and WTI gains slightly on increased refining activity.

The supporting rationale for the forecast is provided below.

Geopolitical: Positive

Geopolitics continues to drive volatility with active hotspots generally more likely to hamper oil supply, helping prices. North Korea continues to stoke international anxiety, launching a second rocket over Japan on Sept. 15 with the U.N. Security Council scheduling an emergency session for the same day to address the launch. Diplomatic options remain limited by North Korea’s already substantial isolation, with Russia and China its only two major foreign trade partners.

The Kurdistan region of Iraq has scheduled an independence referendum for Sept. 25. The region controls about 400-600 million barrels per day of crude oil production, including the large Kirkuk fields. Baghdad opposes the vote and the central government has authorized Prime Minister Haider al-Abadi to take all necessary action to keep the country unified, a troubling pronouncement that could presage violence in the region. Iran and Turkey, which both have large Kurdish populations bordering the Kurdistan region of Iraq, have also voiced concerns about the vote and its potential to destabilize the region.

Dollar: Positive

The dollar’s relationship with crude diverged slightly last week, but remains reasonably strong. The dollar saw some temporary support from Hurricane Irma, but was again pushed down by weak retail sales data. The dollar’s performance will continue to be mixed despite a slowly improving economy, but will likely continue to trend upward in the near term, supporting crude.

Trader Sentiment: Positive

Strong support for bullish sentiment came last week when the IEA and OPEC both released bullish Monthly Oil Market Reports. As the supply side of the story is increasingly viewed as being in-hand, with an effective OPEC deal and no large surge from the U.S., traders will view demand with more importance. Any dip in U.S. demand numbers through the end of 2017 could lead to a dramatic sell-off. Managed money net longs for both WTI and Brent fell slightly in the week to Sept. 12, but future reports are likely to show a more bullish increase.

Supply: Positive

Last week the number of operating oil rigs in the U.S. fell by seven, according to the weekly report from Baker Hughes (NYSE: BHGE). U.S. oil rigs now stand at 749 compared to 416 at this time in 2016. Estimated U.S. production rebounded sharply as outages from Hurricane Harvey were quickly resolved. As estimated, production is not yet at its pre-hurricane level. Another gain could be reported this week, tempering enthusiasm. Globally, fears about oversupply are easing as OPEC’s production agreement continues to work. OPEC’s latest monthly report indicated that August production fell, the first drop since March.

Demand: Neutral

U.S. gasoline demand rebounded sharply in the week ended Sept. 8 after being depressed by Hurricane Harvey. However, this week’s data release could see another sharp move down as the effects of Hurricane Irma and the mass evacuation of swathes of Florida work through the data releases. Distillate held fairly steady as industrial activity in the region resumed and remained healthy in the rest of the country. The next several data releases will likely continue to show “data blips” due to weather effects, but on the whole the pattern of strong demand will remain. Demand is quickly becoming the focal point of market sentiment as supply remains stable. While Stratas Advisors expects strong demand growth this year and next, we caution that ever-increasing global demand growth estimates could lead to unjust disappointment at the end of 2017.

Refining: Negative

The return of a significant portion of Gulf Coast refining capacity cut margins around the globe. However, runs remain healthy and margins are generally still elevated, supporting Brent. Margins will likely stabilize in the week ahead, just in time for fall maintenance season.

How We Did

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