[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 $75.49 after closing the previous week at $72.92. The price of WTI crude ended the week at $71.96 after closing the previous week at $69.72. In last week’s note, we reiterated that there were emerging positive factors for oil prices, but also factors that would constrain the upward rise in oil prices. Additionally, the note highlighted our forecast from early July of this year, which includes a fourth-quarter average price of $76 for Brent and $72 for WTI.
After last week, the price of Brent and the price of WTI have almost reached those levels. However, we are still expecting that there will be factors that will constrain the upward movement of oil prices throughout the rest of the year and beyond.
- One such factor that we have been highlighting is the relative strength of the U.S. dollar. Last week, the U.S. Dollar Index increased to 93.25 from 92.58 from the end of the previous week. Furthermore, the index has rebounded from a low of 92.03 at the beginning of September and is back on the upward trend that started in May of this year, when the U.S. dollar index had fallen to 89.24.
- From a supply perspective, we are expecting that the remaining shut-in production in Gulf of Mexico (in the order of 1 million bbl/d) stemming from Hurricane Ida will soon be coming back to the market along with additional supply from U.S. shale producers. OPEC+ is expected to continue adhering to their agreed supply increases of 400,000 bbl/d, given that the global economy has remained relatively robust during the most recent wave of COVID-19—and that there is increasing probability that wave has peaked and is now declining.
- The ongoing recovery of the global economy will not occur on a straight upward path. Instead, there will be surprises along the ways—especially since accommodating monetary and lending policies increase the risk of unintended consequences. One such event currently unfolding is the potential default of Evergrande, the second-largest property developers in China—and the fear of widespread contagion.
- There are also risks associated with government fiscal and economic policies, as highlighted by the difficulties being faced by the Biden Administration to pass a major infrastructure bill. As time goes on, the probability of passing such a bill is falling, in part, because of the less-favorable approval rating for President Biden.
From a longer-term perspective, besides supply/demand fundamentals, we are also assessing the emerging geopolitical dynamics, which will influence the future path of the global economy, as well as the extent of decarbonization efforts. Geopolitics has always been an important factor shaping the oil markets, and the influence on future decarbonization efforts was recently made clear by China stating that there is a direct linkage between cooperation on environmental issues and geopolitical issues. The geopolitical uncertainties and the growing tensions between the U.S. and China increase the risks associated with shifting away from hydrocarbons, which are widely available across regions—with established supply chains—to alternative sources of energy, which in many cases involve reliance on critical inputs that are more geographically concentrated—and with less robust supply chains. In our Long-term Outlook, we provide an integrated assessment of geopolitics and the other key factors in developing our long-term forecasts of supply, demand and prices for hydrocarbons and alternatives from global, regional, and country-level perspectives.
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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