What's Affecting Oil Prices This Week (May 8, 2017)?
Before last week, Stratas Advisors forecast that the price of Brent crude would trade between $51and $52. The forecast was based on the expectation that downward pressure would continue because of concerns about supply stemming from rebounding U.S. production.
There are also growing concerns about the strength of demand because gasoline demand in the U.S. continues to lag behind that of the previous year. Stratas expected these concerns would be offset by indications that OPEC-led production cuts would be extended by another six months.
Additionally, it expected upward support from the refining sector. While U.S. gasoline demand is lagging, refining inputs to U.S. refineries have been at record levels, which reflect the structural advantage of U.S. refineries. These advantages include scale and complexity, and low-cost feedstocks and energy inputs—coupled with access to markets that require exports.
Stratas Advisors’ forecast of sideways price movement proved to be overly optimistic. The price of Brent crude started the week at $51.73, then started drifting downward through Wednesday, when it reached $50.79. The price of Brent crude then fell significantly on Thursday to $48.38 before rebounding on Friday to close the week at $49.10.
The significant decline on Thursday was initiated by the weekly report from the Energy Information Agency (EIA). While the report indicated that inventories of crude oil in the U.S. fell by 2.4 million barrels (MMbbl), the market focused on inventories of gasoline increasing by 190,000 barrels (Mbbl). It was the third straight week of increases.
Stratas also forecast that the Brent-WTI differential would trade in the range of $2 and $2.50 with respect to the July contract. The Brent-WTI differential started the week at $2.40 then widened to $2.61 on Wednesday. The Brent-WTI differential then narrowed slightly on Wednesday before finishing the week at $2.50.
While the market is exhibiting concerns about the U.S. inventory situation, it is the view of the firm’s Short-Term Outlook team that the concerns are over-hyped. Crude inventories have been declining in the U.S. for several weeks. Furthermore, inventories of gasoline, as well as inventories of distillate fuel oil, remain below the levels of last year during the same time period.
The product inventory situation has occurred even while refinery utilization and crude inputs are running at extremely high levels during the last several weeks—with crude inputs averaging more than 1 MMbbl/d more than for the same time period last year. Additionally, U.S. demand for distillate fuel oil has been very strong this year. While gasoline demand is running below that of last year, gasoline exports are running well above the level of last year.
For the upcoming week, Stratas Advisors is forecasting that the price of Brent crude will move back above $50 and will test $50.80. The firm are also expects that the Brent-WTI differential will trade in the range of $2.30 and $2.80 with respect to the July contract.