[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.]

The price of Brent crude oil ended the week at $69.02 after closing the previous week at $66.73. The price of WTI ended the week at $66.63 after closing the previous week at $63.88. The price movement aligned with expectations that oil prices would move upward with support from the strengthening economy and rebounding demand.

The U.S. economy continues to show signs of growing strength with the Chicago PMI reaching 75.2 in May (up from 72.1), which is the highest reading since December 1983. While there remain concerns about inflation, the bond market is not pushing the Federal Reserve to increase rates. The yield on the 10-year treasury fell to 1.584% from the previous week close of 1.619. Additionally, the U.S. Dollar Index stabilized ending the week at 90.06, in comparison to 89.64 that was reached during the previous week.

The latest weekly report from the EIA indicates that gasoline demand averaged 9.48 million barrels per day (MMbbl/d), which compares to 9.22 MMbbl/d of the previous week. The demand of 9.48 MMbbl/d is 2.2 MMbbl/d greater, in comparison to the same period of the prior year. More importantly, gasoline demand is running slightly higher than during the same period in 2019, which is the first week of such an occurrence since the advent of COVID-19. Furthermore, diesel demand is running 1.2 MMbbl/d more than for the same period of the prior year—and nearly 200,000 bbl/d more than for the same period of 2019.

Analysts are also seeing inventories in the U.S.—crude and refined products—being drawn down. Crude inventories are already below the level of the same period of 2019, and gasoline and diesel inventories will soon be lower, given the strength of demand and the state of the U.S. refining sector. With the closures that occurred in the wake of COVID-19, refining capacity (in CDU terms) has declined by nearly 700,000 b/d. Shell’s announcement of the Deer Park transaction could potentially be equivalent to additional refinery rationalization because of the possibility that much of the product slate will be sent to Mexico, after Pemex takes full control later this year. If this comes to fruition (and contingent upon any outstanding contracts with U.S. clients that Deer Park might still need to honor), PEMEX could send up to 250 MMbbl/d of clean products to Mexico, effectively reducing supply for the USGC market.

From a global demand perspective, Stratas has been more bullish than the IEA (as Stratas was last year, until the IEA revised its forecast upwards more than once)—and Stratas remain so, even with the hit from COVID-19 that India has taken, and the lagging vaccination rate in many Asian countries that is causing some pullback in economic activities.

From a supply perspective, the U.S. shale sector has shifted from a focus on growth to delivering financial returns and dividends. The strategic shift is likely to get even more pronounced with Exxon Mobil facing the need to accommodate the objectives of new members of its Board of Directors, who are associated with the activist investor—Engine No 1—that wants Exxon Mobil to reduce CAPEX, while accelerating efforts pertaining to energy transition—which translates into lower crude oil production.

Stratas Advisors also think concerns about a ramp up in Iranian crude exports has been over-hyped because an agreement between the U.S. and Iran, which would remove oil-related sanctions, anytime soon is unlikely, in part, because the Biden Administration would face significant political pushback.

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.