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Since the election of Donald J Trump, our Geopolitical Team has been assessing the potential impact of the new administration on geopolitics. The team recently assessed how Rex Tillerson, nominee for Secretary of State, would influence policy. Our Geopolitical Team expects that Tillerson is likely to be a moderating influence in the Iran nuclear agreement’s probable re-examination over the next four years, although the evolution of regional conflicts are likely to challenge his anticipated pragmatic approach to Iran. Judging by Tillerson's previously stated positions on climate policy dating back to 2009, he would almost certainly advocate for discarding these commitments and negotiating instead for a revenue-neutral global carbon tax that maintained a level playing field for all countries and industries.
From a broader perspective the tensions between the “Great Powers” continue to elevate – especially between US and China—with China indicating through Chinese media outlets that it will not be backing down with respect to the South China Sea or with respect to its “One China” policy. The risks also remain with respect to several of the oil-producing countries, including Nigeria. The recent terrorist attack that took place Monday at the University of Maiduguri (located in the capital of Borno) highlights the ongoing issue the government has with the group Boko Haram, which has sabotage oil production. We are maintaining our view that the geopolitics will be a positive factor with respect to the price of Brent crude.
Traders of light sweet crude kept their level of net long positions essentially unchanged last week, which represents the fifth straight week of such behavior. The level of long positions has remained the same since the end of last November. A similar situation applies to the level of short positions, which have remained at the same level since mid-December of last year. After the announcement of the agreement of oil producers to reduce production, the level of net long positions spiked by more than 60% with long positions increasing and traders closing out of short positions. During the same time the price of Brent crude moved from the mid-40s to the mid-50s from mid-November to mid-December, where it has remained for the last six weeks. Additionally, the forward curve flattened and shifted into backwardition in Q4 of this year. For the upcoming week we are shifting our view that the sentiment of oil traders will be a positive factor to a neutral factor with respect to the price of Brent crude.
For the upcoming week, we are expecting that crude inventories will decrease between 500,000 barrels and 1.5 million barrels. We are also expecting that the Brent-WTI differential will continue to trade between $2 and $2.75 with respect to the February contract.
For additional factors affecting oil prices this week, including the U.S. dollar, rig counts, gasoline supply and refining margins visit StratasAdvisors.com.
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