[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.]

Last week, the price of Brent crude ended the week at $70.14 after closing the previous week at $71.60. The price of WTI ended the week at $66.22 after closing the previous week at $68.17. Also, as we have been forecasting, the Brent-WTI differential widened to $3.92 from the previous week of $3.46.

After the last two weeks during which the price of Brent crude oil declined from above $82.00 to less than $70.00, we are expecting that oil prices will see some recovery this week. However, we think the traders will remain cautious because of the uncertainties associated with COVID-19 and the potential impact on demand. For the eighth straight week, traders of Brent decreased their net long positions and did so by 21% through a decrease in their long positions and an increase in their short positions. Additionally, net long positions pertaining to WTI are now the lowest since early August of this year.

Prior to the recent downturn in oil prices, we held the view that the price of Brent crude was vulnerable at $85.00 because of downward pressure from several factors—increasing supply, strengthening U.S. dollar, declining sentiment of oil traders, plus the rising cases of COVID-19 (even before Omicron). At the current price level, however, we think the market has overreacted and that oil prices will recover. During the first quarter of 2022, we are forecasting that price of Brent crude will average around $80.00 and that the price of WTI will average around $77.00.

There are downside risks to our forecast, including the following:

  • The risk associated with COVID-19 remains—especially considering the new variant (Omicron). While there remain uncertainties, we hold the view that the most likely outcome is that the variant will not result in any significant disruptions and that economic activity will continue to expand. However, there is still a risk of a major spike in cases associated with the winter season and the colder weather in the northern hemisphere, as well as potential policy blunders.
  • While the global economy continues to recover, fragility remains, and the economies are vulnerable to missteps associated with fiscal and monetary policies, which could result in a market disruption that would affect the real economy and oil demand.
  • Another risk stems from an agreement that would allow Iran to increase crude imports to pre-sanction levels, which could result in an additional 1.5 to 2.0 million bbl/d of crude oil being placed into the global market. Such a development could trigger a reaction from some of the OPEC+ members, and more barrels being supplied because of producers fearing a loss of market share. At this time, even with the current efforts to restart the talks between the west and Iran, we think such an agreement is unlikely any time soon.
What Is Affecting Oil Prices the Week of December 6, 2021? Stratas Advisors Infographic

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.