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[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 last week at $75.97 after closing the previous week at $75.31. The price of WTI ended the week at $75.14 after closing the previous week at $74. The Brent-WTI differential continues to narrow, in part, because crude inventories in the U.S. have been falling for the last five months, the rebound in the U.S. economy has been relatively stronger than the rest of the western economies, and the sentiment of oil traders has been more bullish with respect to WTI.
Outside of North America, the focus is on OPEC+, which members were unable to come to an agreement last week. An agreement to increase supply by 400,000 bbl/d per month from August to December and extending the OPEC+ framework past April 2022 was close at hand. However, the agreement hit a roadblock with the United Arab Emirates (UAE) pushing for an increase to its baseline, from which the supply adjustments are being made, because the UAE believes that the current baseline does not reflect its maximum production capabilities. Negotiations are set to resume July 5 at 3 p.m. Vienna time.
UPDATE:
OPEC+ Abandons Oil Output Meeting after Saudi-UAE Clash
We are expecting that agreement will still be reached, given that Saudi Arabia and the other members cannot afford to have the OPEC+ framework falling apart while global oil demand is still running about 2.5 million bbl/d less than pre-COVID levels. The agreement will need to balance competing factors including:
- Oil prices that are sufficient to support the fiscal needs of the OPEC+ members, but not so high that the economic recovery is stifled. Currently, oil prices are at a level that are starting to affect the developing economies, which are still dealing with COVID-19. Furthermore, oil prices are near the level that are allowing most of the OPEC+ members, including Saudi Arabia to balance their budgets.
- Protection of current and future market share of OPEC+ members, which could be at risk if high oil prices stemming from lagging supply increases from OPEC+ provides the incentive for non-OPEC members to increase supply and capture market share. The forecasted demand growth in the third and fourth quarters provides room for OPEC+ to increase supply by around 500,000 bbl/d per month through the rest of the year, coupled with non-OPEC supply increases of around 300,000 bbl/d per month—and keep global supply less than global demand by some 750,000 bbl/d.
- Timing and resulting impact of Iran being able to increase oil exports once an agreement is reached between U.S. and Iran. With the removal of sanctions, Iran would be able to increase oil exports by 1.5 million—2 million bbl/d. The impact on the oil prices will be much less if the additional Iranian barrels do not arrive until the second half of 2022.
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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