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 the week at $92.84 after closing the previous week at $93.02. The price of WTI ended the week at $86.79 after closing the previous week $86.87. Prices rebounded in the latter part of the week after declining through Sept. 7. The price of Brent, however, remains below the 200-day moving average.
Additionally, there remain factors that are putting downward pressure on oil prices.
- The major economies continue to show signs of slowing down. While the U.S. continues to add jobs, the purchasing managers’ index (PMI) are trending downwards with the composite PMI declining to 44.60 from 47.70 in July. The Service PMI declined to 43.70 from 47.30 and the manufacturing PMI declined to 51.50 from 52.30. The other major economies are also seeing similar weakness.
- China’s composite PMI declined to 54.0 from 53.0
- Japan’s composite PMI declined to 49.4 from 50.2
- Germany’s composite PMI declined to 46.9 from 48.1
- U.K.’s composite PMI declined to 49.6 from 52.1
- One exception is the economy of India, whose composite PMI increased to 58.2 from 56.6.
- The U.S. dollar remains strong with the U.S. Dollar Index ending the week at 109.00 after closing the previous week at 109.53. The strong U.S. dollar is putting further pressure on the economies of other countries because it is making dollar-denominated commodities more expensive.
- Growth in oil demand continues to weaken, and in response Stratas Advisors has reduced its forecast. In our latest quarterly update of our global outlook for the oil markets, we are forecasting that global oil demand in the third quarter will increase by 1.5 million bbl/d in comparison to the second quarter of this year, which is around 300,000 bbl/d less than our previous forecast. For the fourth quarter we are forecasting that demand will increase by 1.1 million bbl/d in comparison to the third quarter. In the fourth quarter, oil demand is expected to average 101.1 million bbl/d. On average, we are forecasting that global demand will increase by 2.2 million bbl/d in 2022, which compares to 2.6 million bbl/d in our previous forecast.
- Oil traders continue to trim their net long positions, which remain at the low levels last seen in April 2020.
On the other hand, there are factors offering support for oil prices—all supply-related.
- Upstream activity remains muted. Last week, the number of operating oil rigs in the U.S. decreased by five and now stands at 591 rigs, which compares to the pre-COVID level of 683 that occurred during the week of March 13, 2020. The number of operating oil rigs in Canada decreased by three and now stands at 140, which compares to 87 operating rigs for the same period of the previous year. From a global perspective the total oil and gas rig count reached 1,825 at the end of August, which compares to 1,361 of the previous year, but is still well below that of 2019, when the rig count was 2,206. While the U.S. and Canadian rig count lags 2019 level by 15%, the rig count in the other regions lags by 22%. The rig count in Europe lags by 31%, Africa by 32%, Middle East by 26%, Asia by 13%, and Latin America by 9%.
- We have long been skeptical of a renewal of the Iran nuclear deal and the current negotiations appears to be reaching a breaking point. The U.S. Secretary of State stated last week that recent demands from Iran have taken the negotiations backwards. European negotiators have also voiced concerns about the lack of seriousness being exhibited by the Iranian negotiators.
- The level of inventories in the Strategic Petroleum Reserve (SPR) declined last week by 7.53 million barrels. Since the beginning of the year, inventories in the SPR have been drawn down by 151 million barrels. In comparison, commercial inventories have increased by only 9.34 million barrels.
Looking forward, there is support at $85 price level for Brent crude. Also, OPEC+ will want to keep the oil price from collapsing and will attempt to adjust supply to align with demand. As such, we think oil prices will stabilize through the rest of the year with the risk of an upward spike in oil prices fading.
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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