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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.]
At the end of last week, oil prices reached the highest level since early March of this year. Brent Crude closed the week at $48.15, while WTI closed the week at $42.42—with each of the crude oils gaining around $3 in one week. Oil prices have been increasing in recent weeks for several reasons, including: positive news about the vaccines for COVID-19, expectations that OPEC+ will agree to delay the next round of reductions in production cuts, among others.
Global Supply—Positive
For the upcoming week, we are expecting this variable to be supportive for oil prices because we are expecting that OPEC+ will reach an agreement to delay the reduction in production cuts—mainly because the two most important parties—Saudi Arabia and Russia—favor of the delay.
Geopolitics—Positive
For this week, the most important geopolitical development affecting the oil markets is the recent developments involving Iran. The assassination of its top nuclear scientist will provide support for a response at some point. In the near-term, it is more likely that Iran will respond with some harsh rhetoric, which will provide minor support for oil prices.
As such, for the upcoming week, we expect this variable to have a positive impact on oil prices.
Economy—Neutral
The strength of the U.S. economy, and the speed of its recovery, has been a major factor for the rebound in oil demand and oil prices.
Nevertheless, the deterioration of the job market is being offset by the wealth effect associated with the rising stock market and housing values. The wealth effect will support consumer spending, which represents some 70% of the U.S. economy.
For the upcoming week, we expect this variable to be a neutral factor for oil prices.
Oil Demand—Neutral
Oil demand continues to hold up fairly well during the ongoing wave of COVID-19 infections. Even though the entire U.S. is at a heightened state with respect to COVID-19, economic activity and travel is continuing.
For the upcoming week, we expect this variable will be a neutral factor for oil prices.
Refining Sector—Neutral
The refining sector continues to be under pressure because of the weakness in demand. U.S. refiners continue to operate at utilization rates between 75%-80%—significantly below the more than 90% rate that the refineries were operating at before COVID-19.
Asian refineries have been seeing better crack spreads—including distillate crack spreads. However, China has reduced purchases of crude oil in response to increasing prices and rising stock levels of crude oil.
For the upcoming week, we expect this variable will be a neutral factor for oil prices.
Oil Trader Sentiment—Neutral
For this week, we are expecting oil traders to be waiting to see what comes out of the OPEC and OPEC+ meetings that are scheduled for Nov. 30 and Dec. 1. It is likely that the current oil price reflects much of the impact if the decision is to delay the reduction in the production cuts—which we think it the most likely way forward for OPEC+.
Therefore, for the upcoming week, we expect this variable will be a neutral factor for oil prices.
About the Author:
Jaime Brito is vice president at Stratas Advisors with over 24 years of experience on refining economics and market strategies for the oil industry. He is responsible for managing the refining and crude-related services, as well as completing consulting.
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