Prior to the beginning of last week we forecast that the price of Brent crude would trade between $51 and $53. The forecast was based on the expectation that there would be insufficient support for Brent crude to break out of the trading range because of the strengthening of the US dollar coupled with the oil traders shifting to a more cautious sentiment. The actual price movement aligned closely with our expectations.
The price of Brent crude started the week at $51.95, then moved to $52.67 in the middle of the week before falling back to close at $51.78.
As expected, the price of Brent crude was negatively affected by the strengthening of the U.S. dollar, which started the week at 1.097 with respect to the euro, and stayed relatively unchanged until strengthening later in the week to close at 1.088 with respect to the euro. Additionally—as we expected—the oil traders did shift to a more cautious sentiment.
The latest data from the Commodity Futures Trading Commission indicated that net long positions of light sweet crude only grew by 3,511 contracts after increasing by an average of 46,825 contracts per week for the previous three weeks.
We also forecasted that the Brent-WTI differential would continue to trade between $1 and $2. In actuality, the Brent-WTI differential narrowed more than our forecast. At the beginning of the week the Brent-WTI differential was at $1.20, then narrowed through Thursday to 75 cents before widening on Friday to close the week at 93 cents.
The narrowing of the Brent-WTI differential was driven, in part, by the significant drawdown in the inventories of crude reported by the Energy Information Agency (EIA). According to the latest weekly EIA report, during the previous week crude inventories declined by 5.247 million barrels.
For another week we are forecasting that the price of Brent crude will not have sufficient support to break out of a trading range between $51 and $53. We are also forecasting that the Brent-WTI differential will trade between 75 cents and $1.50 with respect to the December contract.
More justification for this forecast is available at StratasAdvisors.com.
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