[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 oil ended the week at $68.27 after closing the previous week at $66.44. Similar to the previous week, the price of Brent crude reached its highest price on May 5 ($68.96) before falling back. The price of WTI ended the week at $64.71 after closing the previous week at $63.49. The price of WTI also hit its high on May 5 ($65.69) before falling back.
At the end of last week, there were two major developments that are impacting the oil markets. The first development was the disappointing U.S. jobs report, which indicated that only 266,000 jobs were added in April. The question now is what the disappointing jobs report means for the future. Stratas Advisors has been relatively bullish on the U.S. economy since the middle of last year with the expectation that the U.S. economy would rebound more quickly than expected because of the progress being made with respect to vaccines, implementation of accommodating monetary policy and aggressive fiscal initiatives—coupled with the inherent robustness and flexibility of the U.S. economy.
At this time, we do not see any reason to change that view.
- The U.S. is making good progress with the vaccines with about 45% of adults receiving at least one vaccine shot. With the increase in vaccinations and the drop in COVID-19 cases, many states including New York, California, Texas, and Florida are removing or easing restrictions.
- The U.S. economy will still be benefiting from the $1.9 trillion recovery/stimulus package that was passed earlier this year after the $900 billion recovery/stimulus package that was passed at the end of 2020.
- The Federal Reserve has indicated that it will maintain accommodating policies at least through the rest of the year—and the weak jobs report only reinforces the concerns that the Federal Reserve has voiced about the U.S. labor market.
- In addition to the above factors, the U.S. consumer is well-positioned to support economic growth with a savings rate that jumped to 21% in the first quarter of the year, even with increased spending by 10.7%.
Another development is the cyberattack, which has resulted in the Colonial Pipeline being shut down. This is the major pipeline that moves refined products from Texas up the East Coast of the U.S. The pipeline supplies around 45% of the total demand of the region, which is the highest consuming region in the U.S. While there is no immediate risk of widespread shortages (currently the region has about 20 days of gasoline inventory), product prices will rise, in part, to support increased imports from Europe and higher transportation costs associated with increased volume being moved by truck. Obviously, the longer the outage goes on the greater the impact and the risk of shortages—and panic-buying, which will further aggravate the situation.
A complicating factor is the geopolitical angle. At this time, the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency believes that the intrusion is the responsibility of a criminal ransomware group known as Darkside, which utilizes a Ransomware-as-a-Corporation (RaaC) model. While the alleged attacker is not a state-actor, Darkside has been linked to Russia in that researchers have found that Darkside was advertising their services on Russian hacker forums. Additionally, Darkside’s ransomware is designed to avoid infecting systems in Commonwealth of Independent States (CIS) countries, including Russia. It is also known that many of the most aggressive hacking groups are in countries like Russia. Given the importance of the Colonial Pipeline to the logistical infrastructure of petroleum products for the East Coast of the U.S. (the largest consuming region in the U.S.) and the high-profile nature of the attack, the Biden Administration will need to respond. The greater the tensions between the U.S. and Russia, the increased probability that Russia will be inclined to disrupt the OPEC+ framework, which has been essential to the stabilization of the oil market.
For the upcoming week, we are expecting that oil prices will drift sideways with an upward bias, while product prices in the Atlantic Basin will move upward until the Colonial Pipeline is back in service.
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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