In the week since Stratas Advisors' last edition of What’s Affecting Oil Prices, Brent crude increased $2.20/bbl on rapidly improving sentiment. For the week ahead the firm expects prices to continue seeing support around $47.25/bbl, but likely to meet resistance at $50/bbl. Overall, the week’s average will be sub-$50, but regardless benefiting from improved sentiment and fundamentals. While a much larger than expected EIA crude draw for the third week in a row is likely to push Brent above the $50 threshold, Stratas Advisors expects the market to move cautiously through this week given lingering concerns about market fundamentals. The supporting rationale for the forecast is provided below.

Geopolitical: Neutral

With no new situations on the horizon, recent geopolitical developments are unlikely to play a large part in oil prices this week, barring a surprise development. The situations in Venezuela, Libya and Qatar remain the most relevant for oil markets, and Stratas Advisors will continue to monitor developments.

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 been previously. The dollar fell last week against the Euro, closing the week at 1.146, after disappointing economic data and statements from policymakers urging caution around raising rates and softening inflation. Outside of the dollar’s direct impact on crude prices, growing doubts about the U.S. economy could weigh on crude prices.

Trader Sentiment: Positive

Sentiment has drastically improved over the last two weeks. Crude and product stock draws, and a slowdown in the pace of supply expansion are feeding into a sentimental turn, which is also being reflected in the general tone of news flow. On the technical side, it appears a pretty firm floor has developed at $47.25/bbl. There could potentially be some profit-taking next week, but it is unlikely these moves will be dramatic as traders expect there to be more upside.

Supply: Neutral

For the first time in three weeks, Stratas Advisors view supply as a neutral factor on prices next week. Last week the number of operating oil rigs in the U.S. increased by two, according to the weekly report from Baker Hughes. U.S. oil rigs now stand at 765, compared to 357 at the same time last year. In the latest weekly estimates from the U.S., domestic crude production rose by 59 Mbbl/d. However, the EIA’s recently published STEO slightly lowered the outlook for 2018 crude production on the back of lower crude prices in the latter half of 2017. In Saudi Arabia, the 900 Mbbl/d Manifa oil field is reportedly experiencing technical problems with the water reinjection system, but details have been scarce on the exact volumes impacted.

Demand: Positive

Demand remains healthy, lending support to crude prices. EIA product supplied numbers showed gasoline increasing, although distillate did reverse the prior week’s gains. Crude stocks have been drawn back below the 500 MMbbl mark, an important psychological limit, on strong runs. In Asia, indications of rapidly strengthening demand in are complementing demand’s ramp-up in the Atlantic Basin. As short-term demand rises (and prices begin to reflect that), backward-dated product forwards in Singapore are pushing a greater number of barrels into the market, driving inventory reductions. Demand continuing to meet expectations is a positive for overall market sentiment.

Refining: Positive

Refining margins were up in the U.S. and Europe last week while falling slightly in Asia (but remaining strong). In the U.S., the WTI crack at the Gulf Coast was up $0.22/bbl while the Brent crack at the Gulf Coast was up $1.25/bbl. Next week’s EIA data will likely show yet another increase in U.S. crude runs. In Asia, the Dubai Singapore crack fell $0.59/bbl while Dubai Singapore Hydroskimming fell $0.44/bbl. Despite the trickle down, margins in the region remain elevated and utilization in Japan is reportedly around 98%.

For the upcoming week, Stratas Advisors is expecting crude inventories will see another draw although smaller than in the prior two weeks. Crude stocks in the U.S. are expected to fall about 3 million to 4 million bbl. We also expect the Brent-WTI differential will remain in its current range, trading around $2.20/bbl next week with respect to the September contract.