Before the beginning of last week Stratas Advisors expected that the price of Brent crude would have more downside than upside risk and would trade toward $45.50. The forecast was driven by the firm's expectations that the supply/demand situation would be less supportive of the Brent crude price.

Downward pressure was expected by the robust supply from OPEC and the resiliency of shale-related production in the U.S. Downward pressure was also expected by the weakening the demand-side of the equation, as evidenced by the elevated product inventories.

The weakness is also being reflected in the narrowing product crack spreads, which will translate in lower utilization for refineries—the ultimate buyer of crude. Additionally, the continued strength of the U.S. dollar is putting downward pressure on the price of Brent crude.

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Stratas' forecast for the price of crude tracked closely with the actual price movement of Brent crude. The price of Brent crude started the week at $47.61 then declined slightly during the first part of the week before declining more significantly after July 20 to close at $45.69.

The more significant decline later in the week was driven by another disappointing inventory report from the Energy Information Agency (EIA), which indicated that crude inventories decreased by only 2.34 million barrels (MMbbl)—while gasoline inventories actually increased by 911,000 bbl—during the midst of the peak driving season in the U.S.

For the period from the beginning of May until the middle of July, gasoline inventories in the U.S. have remained relatively unchanged. In comparison, for the same time period of the previous year, gasoline inventories declined by 9.44 MMbbl.

Statas also forecasted that the Brent-WTI differential would trade between $0.50 and $1.10 with respect to the September contract. In actuality, the Brent-WTI differential started the week at $0.96 then widened through the week to close at $1.50. Similar to last week, the less-than-favorable EIA inventory report supported the widening of the Brent-WTI differential.

For the upcoming week Stratas is expecting that the price of Brent crude will continue to be under pressure and will break below $45. The firm is also expecting that the Brent-WTI differential will trade between $1 and $2 with respect to the September contract.

For more analysis, including the effects of rig counts, the U.S. dollar and refining margins, visit StratasAdvisors.com.