What's Affecting Oil Prices This Week (July 31, 2017)?

Monday, July 31, 2017 - 10:45am

In the week since Stratas Advisors' last edition of What’s Affecting Oil Prices, Brent crude increased $4.46 per barrel (bbl) week-close to week-close.

For the week ahead Stratas Advisors expects prices to remain flat or fall on fears that the market is overbought and potentially negative supply headlines. Brent will likely average $50/bbl.

For the upcoming week, the firm is expecting that crude inventories will see another albeit smaller draw, more in line with seasonal norms. Crude stocks in the U.S. are expected to fall about 3 million to 4 million bbl as runs appear to have steadied near a seasonal peak. Imports, which have been fairly flat the last few weeks, could see more movement due to shipment timing.

Stratas Advisors also expects the Brent-West Texas Intermediate (WTI) differential will increase slightly as Brent’s gains outpace WTI’s. The differential will likely trade around $2.50/bbl in the week ahead, the firm said.

Geopolitical: Neutral

Geopolitics, as it relates to oil, remains fairly uneventful and therefore unlikely to play a large part in oil prices this week, barring a surprise development. The Maduro government held contentious congressional elections over the weekend, in defiance of global opposition. It remains to be seen if the U.S. government, which has already implemented targeted sanctions against senior officials, may now implement broader industry based sanctions.

Dollar: Neutral

Given the substantial impact on prices from fundamentals and sentiment, the DXY as well as the USD/EUR exchange rate are still not as impactful as they have previously been. Speculators have increased short positioning against the U.S. dollar, reflecting expected dollar weakness. The expected weakness stems from political uncertainty and a belief that the Federal Reserve will choose to keep interest rates steady in the U.S.

Trader Sentiment: Negative

Trader sentiment will be a negative factor in the week ahead as Brent quickly approaches overbought territory. Brent’s Relative Strength Index is at 67.76 with 70 being the traditional overbought line. Brent has also broken out of the top of the Bollinger bands. Given likely fears that Brent is overbought, traders will presumably be especially sensitive to any negative fundamental data. ICE Brent Managed Money net longs have retreated from their lows for the year over the past several weeks and now stand at 261,652. Much of this improvement is due to a drastic drop in shorts, not an increase in long positions. As oil companies have begun reporting second-quarter earnings, a narrative of cost-cutting is emerging that could hurt future production and price performance. This could lead to prices temporarily outperforming E&Ps in general.

Supply: Negative

Last week the number of operating oil rigs in the U.S. increased by three, according to the weekly report from Baker Hughes Inc. (NYSE: BHGE). U.S. oil rigs now stand at 766 compared to 374 at the same time last year. In the latest weekly estimates from the U.S., domestic crude production fell 19,000 bbl/d with the entirety of the decline stemming from Alaska production. Lower 48 production is estimated to have actually increased 35,000 bbl/d. Saudi Arabia has reiterated its commitment to OPEC’s current supply agreement, and summer crude burn in the country should dent exports slightly. However, several members’ production remains above agreed-to limits, denting the effectiveness of the deal. A joint OPEC/non-OPEC meeting is being held Aug. 7-8 for deal participants to discuss why production is still elevated. A 100,000 bbl/d pipeline in Nigeria is offline due to sabotage, highlighting the difficulty Nigeria will have in rapidly and sustainably increasing production.

Demand: Positive

Healthy demand remains a supportive factor for crude prices. Energy Information Administration product-supplied numbers showed total product demand increasing last week, with an especially strong gain in gasoline demand and healthy gains in distillate and jet fuel. Gasoline and distillate stocks both fell last week and are below last year’s levels. ARA stocks fell slightly on a sharp drop in jet kero and naphtha. First- and second-quarter fears about demand faltering have mostly receded, and traders are increasingly focusing primarily on supply trends.

Refining: Positive

Refining margins in the US were up last week, but fell in Europe and were mixed in Asia. In the U.S., the WTI crack at the Gulf Coast reached $13.86/bbl, creating a new high for 2017 while the Brent crack reached $9.60/bbl, quickly approaching the 2017 high of $9.80/bbl. In Western Europe, cracks retreated from the prior week’s highs but still remain elevated, with a similar story in the Mediterranean. In Singapore, the Dubai crack reached a new 2017 high at $8.03/bbl while Dubai hydroskimming backed off slightly from last week’s high. Globally margins continue to justify elevated run rates, supporting crude demand and prices.