[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 ended the week at 81.93 after closing the previous week at $77.94. The price of WTI ended the week at $78.94 after closing the previous week at $75.45. Prices of Brent crude and WTI crude both started drifting downward on Jan. 7.
Last week, the oil market was affected by supply-related developments including members of OPEC+ agreeing to maintain the monthly increases of 400,000 bbl/d in February. Oil supply, however, was negatively impacted by developments in Kazakhstan and in Libya. Oil production associated with Kazakhstan’s Tengiz Field (representing about 700,000 bbl/d of Kazakhstan’s production) was reduced on Jan. 6 because of disruptions caused by contractors in support of the protests stemming from increased fuel prices. Libya’s oil production was reduced by another 200,000 bbl/d because of a pipeline issue, which added to the more than 300,000 bbl/d production loss associated with four oil fields that started in mid- December of last year. As a result, Libya’s, oil production has declined to 729,000 bbl/d, (according to the National Oil Corp.), from around 1.2 million bbl/d. While it appears the pipeline issue is being resolved, the other production losses are still in effect.
The oil market is also being affected by geopolitical developments, including those involving Russia. During the upcoming week, Russia and the U.S. are scheduled to hold diplomatic meetings pertaining to Ukraine. Russia is expressing concerns about NATO’s expansion to the east and the ties to Ukraine. Additionally, Russia has put forth demands that the U.S. and it European allies stop military activity in Eastern Europe and Central Asia. These demands seem to be related to Putin’s long-held views that the U.S. and allies did not adhere to an “agreement” established after the fall of the Soviet Union to not expand NATO toward the east, coupled with Putin’s desire to reestablish the borders of the former Soviet Union. Along with the heightened tensions because of Ukraine, there is the disruption involving Kazakhstan. It seems that Russia will take the necessary steps to stabilize the situation, given the importance of Kazakhstan to Russia, including linkages between Russia and Kazakhstan involving Russia’s space program and missile testing, and the mining of uranium There is also the potential for refugees with about 25% of Kazakhstan’s population being ethic Russians. In response, Russia has sent 3,000 paratroopers to Kazakhstan.
The oil market is also being affected by macroeconomics. The latest U.S. monthly jobs report, which was released on Jan. 7, was disappointing with the U.S. only adding 199,000 jobs, which was well below the expectations of 450,000. Better news is that average hourly earnings increased by 0.6% from November and the unemployment rate declined to 3.9% from 4.2% in November. However, while the labor participation was revised to 61.9%, the number of jobs is still lower than the pre-pandemic level by some 3.6 million. Unfortunately, we also still need to consider the impact of COVID-19 on economic activity and oil demand. COVID-19 cases are continuing to increase, and globally, the number of cases (2.28 million) is now almost three times the previous peak that occurred in April 2021. However, the number of deaths per day are less than 50% of the peak that occurred during January of 2021 (14,435 versus 6,321). While Europe and North America still represent the bulk of the cases, cases are now increasing in all the other regions, although from a much lower level. During the last 14 days, cases, from a global perspective, have increased by 202%; however, deaths during the same period have declined by 5%. U.S. government officials are starting to shift to a perspective that the number of cases is not the priority, but instead the focus needs to be on moderating the increase in hospitalizations and deaths. In Asia, cases are still low, but starting to move upward. In response, as with previous waves, many countries in Asia are taking aggressive steps to prevent the spread of COVID-19. For example, New Zealand is delaying a phased opening of borders until February, and Thailand is suspending its quarantine-free travel policy. China is still maintaining its zero-COVID policy, and has implemented lockdowns for the city of Xi’an, which has factories that make processor chips for smartphones, auto parts and other goods for global and domestic use. China has also limited access to Ningbo, which is a major port, south of Shanghai, as well as locking down the city of Yuzhou (located in Henan province) and the city of Yongji (located in Shanxi).
The oil market is also concerned about central bankers increasing interest rates. Currently, the market is expecting that the Federal Reserve will increase rates by 0.25% in March, plus two (or even three) more rate increases in 2022. An important data point to watch for is the U.S. consumer price report that will be released on Jan. 12. We think the Federal Reserve will increase rates at some point, but we still think that the Federal Reserve will be cautious in doing so for several reasons, including the following:
- Risk that remains with COVID-19 and the potential negative impact on the economy, including the inability of people to work
- The difficulty that the Biden administration has had in securing the additional, multitrillion spending package
- The amount of inflation that is the result of supply chain issues and supply/demand forces that are not directly linked to monetary policies
While we think the fundamentals still look favorable for the oil market, for the upcoming week, we are expecting that oil prices will be under pressure.
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.
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