Due to the Labor Day holiday in the U.S., this week’s edition of What’s Affecting Oil Prices will be abbreviated. As always, feel free to reach out with questions.
In the week since our last edition of What’s Affecting Oil Prices, Brent crude rose 34 cents a barrel (bbl) week-close to week-close. Brent prices averaged $51.98/bbl last week, slightly below the previous week, but are likely to increase in the week ahead as U.S. crude exports and U.S. refining runs remain hobbled. Stratas Advisors expects Brent crude to average $52.50/bbl.
For the upcoming week Stratas Advisors expects that crude stocks will build as significant refining capacity was offline in the U.S. Gulf Coast region for much of the week due to Hurricane Harvey and crude exports were blocked. Crude stocks likely increased 9.4 million barrels. Stratas Advisors also expect the Brent-WTI differential to increase slightly, averaging $5.50 in the week ahead as WTI remains weak on lower runs and export disruptions.
The supporting rationale for the forecast is provided below.
Geopolitics, as it relates to oil, will continue to drive volatility with the few active hotspots that bear watching more likely to hamper oil supply, helping prices.
While fundamentals and sentiment still weigh heavily, the dollar’s relationship with crude has been strengthening. The dollar will likely remain weak in the week ahead, supporting crude.
Trader Sentiment: Positive
Trader sentiment will be a positive factor in the week ahead as Brent has backed off of overbought. Traders will remain sensitive to any negative fundamentals, but will be buoyed by reports of outages in the Gulf of Mexico due to Hurricane Harvey.
Last week the number of operating oil rigs in the U.S. was flat, according to the weekly report from Baker Hughes. U.S. oil rigs now stand at 759, compared to 407 at the this time in 2016. Outages caused by Hurricane Harvey both on- and off-shore are likely to drag down production figures in next week’s data release with an average of 300 million barrels per day offline both on and offshore. Additionally, the extended closure of the Port of Corpus Christi and Port of Houston, including the Houston Ship Channel, will hamper U.S. crude exports. The lack of U.S. light crude should help support Brent in the week ahead.
Overall, demand remains supportive with both U.S. gasoline and diesel product supplied well above the five-year average. However, next week’s data will likely show a decrease in demand as large swaths of the Gulf Coast region and interior U.S. reduce demand in the wake of Hurricane Harvey. While demand in PADD III could be affected in the long-term, we expect the most severe impact to be fairly transient.
The temporary loss of a significant portion of Gulf Coast refining capacity will likely bolster margins in other regions, supporting higher run rates to make up for the lack of PADD III production.
How We Did
Other disruptions, including bottlenecks in Canada, squeeze global supply of heavy crude.
Exports are insufficient so far to keep propane inventories manageable, but as the price continues to drop, that could change.
Oil held near 2019 highs on March 20, supported by tightening U.S. stocks and declining output from key producers due to OPEC production cuts and U.S. sanctions on Iran and Venezuela.