The price of Brent crude ended the week at $76.61 after closing the previous week at $74.79. The price of WTI ended the week at $71.78 after closing the previous week at $70.17.

WAOP Infographic 619
(Source: Stratas Advisors)

The movement of oil prices last week aligned closely with our expectations that the price of Brent crude would fluctuate between $72 and $76. Prices dipped early in the week, but recovered later in the week, in part, because the Federal Reserve announced a pause in interact rate hikes.  The rebound occurred even though there were increases in U.S. inventories of crude oil and refined products. The EIA report also indicated that U.S. crude inventories increased by 7.92 MMbbl/d and that gasoline inventories increased by 2.11 MMbbl and diesel inventories increased by 2.12 MMbbl. Additionally, the U.S. continues to release crude oil from its SPR. The level of inventories in the Strategic Petroleum Reserve (SPR) decreased by 1.88 million and fell to 351.69 MMbbl. Last week’s drawdown was the eleventh consecutive week of drawdown. We are expecting that the weekly draws will last for another nine weeks. Since the beginning of 2022, inventories in the SPR have been drawn down by 242 MMbbl. In comparison, commercial inventories have increased by 55.24 MMbbl.

While the Federal Reserve did not raise rates at its last meeting, the chairman of the Federal Reserve, hinted strongly that rate hikes will resume in July. The Federal Reserve continues to be worried about inflation with core inflation (excluding food and energy) increasing, even though headline inflation has been decreasing. It also seems that the Federal Reserve feels the need for higher interest rates and will not be satisfied until the unemployment rate starts increasing and moves above 4.0%, even though real wages have been decreasing for 26 consecutive months. Meanwhile, China is moving to a more accommodating monetary policy to support economic growth, an option that is available because China is not facing an inflation problem. Consequently, the Chinese RMB has moved from 6.70 to the U.S. dollar in January of this year to 7.13 to the U.S. dollar and is likely to weaken further with China moving to a more accommodating monetary policy to support economic growth. Typically, a weaker currency will dampen oil demand since the oil price in the local currency will be higher. In the case of China, the impact will be offset by China being able to increase exports because of is depreciated currency, which, in turn will boost economic growth and oil demand.

There has been more news about talks between the U.S. and Iran with talks between the two parties taking place in Oman. It seems that the talks are now focused on a short-term agreement and not the revival of the Joint Comprehensive Plan of Action (JCPOA). The objectives, however, appear to be very limited with Iran allowed to receive debt payments from Iraq, while the U.S. is seeking a release of U.S. citizens being held in Iran, some limitation of Iran’s support of Russia with respect to the Russia-Ukraine conflict, and Iran halting the seizure of oil tankers traveling through the Arab/Persian Gulf.  These modest objectives align with our view that a return to an agreement similar to the Joint Comprehensive Plan of Action (JCPOA) is very unlikely. We do not believe that Iran will give up its nuclear ambitions and this point was recently reiterated by Iran’s supreme leader, who stated that the infrastructure of Iran’s nuclear industry should not be touched. At the same time, the U.S. State Department stated that the Biden Administration is committed to never allowing Iran to acquire a nuclear weapon. Additionally, we do not think Iran is that motivated in securing a deal because of its growing ties to China and Russia, which provides an alternative to making concessions to the west. Furthermore, Iran has been able to increase its oil production and exports since the beginning of the Biden administration. Iran’s oil production is now back to nearly 3.0 MMbbl/d and while exports are still well below the level (2.50 MMbbl/d) before the U.S. applied additional sanctions on Iran, exports are running at the highest level since 2018 (with China being the main destination). The increasing exports coupled with the talks between Iran and the U.S. is placing some downward pressure on oil prices.

During this week, we are expecting that the price of Brent crude will remain below $77.00.

For a complete forecast of refined products and prices, please refer to our Short-term Outlook.

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.