In the week since our last edition of What’s Affecting Oil Prices, Brent averaged $63.78/bbl. For the upcoming week, Stratas Advisors expect prices to average $64.50/bbl with increased volatility.
Geopolitical developments in the Middle East are again factoring into prices and could lead Brent to touch $65/bbl, as prices could potentially receive a reality check from upcoming reports from the IEA and OPEC. Stratas Advisors expects the Brent-West Texas Intermediate (WTI) differential to average $6.75/bbl.
The supporting rationale for the forecast is provided below.
Geopolitics as it relates to oil could continue to drive volatility, but is unlikely to have an additional immediate fundamental impact. However, the few active hotspots that bears watching are more likely to hamper oil supply, further helping prices. The escalating conflict between Saudi Arabia and Lebanon (and by default Iran) will be in headlines this week and could raise tensions heading into the OPEC meeting at the end of November.
Crude oil continues to trade independent of the dollar as momentum and sentiment wield greater influence. The U.S. Dollar Index had a quiet week, as there were no major economic data releases to drive trading. This week could see more activity as legislation on tax reform is debated.
Trader Sentiment: Positive
Hedge funds continue to operate under the mantra “no news is good news”. With nothing apparent to deter the current bull run on prices, managed money net longs again increased across the board and are now above the five-year range for both ICE and Nymex, WTI and ICE Brent. Brent’s Relative Strength Index has been at or above overbought levels for three straight weeks, but the price is trending to the middle of the Bollinger Bands channel, sending conflicting messages on the likelihood of a correction. Monthly reports from OPEC and the IEA this week could dinge sentiment if balances have been revised down.
U.S. inventories have slowed their recent draws, falling more in line with seasonal patterns. Estimated U.S. crude supply rose to a new record high. Falling exports and high production could weigh on prices in the week ahead, especially if the upcoming IEA report flags the dangers of overheated U.S. production. The earthquake on the border of Iran and Iraq has caused significant damage, but current reports do not indicate that supply has been impacted.
Demand remains healthy in the U.S., with strong product exports indicating a robust appetite elsewhere as well. U.S. gasoline stocks have fallen below the five-year average on robust domestic demand and strong export flows. Distillate stocks have also been falling, although more of the draw appears attributable to export demand as domestic demand has vacillated near the five-year average. As long as export and demand numbers remain healthy, demand will support crude prices.
Margins fell everywhere, but the U.S. Gulf Coast last week as crude prices continue their upward march. While the robust profits seen earlier this year have evaporated, margins continue to trend at or above their five-year averages. Combined with healthy global demand, current margins will continue to incentivize crude intake. WTI cracking remains the most profitable of the margins tracked, at $15.76/bbl last week on a still-wide Brent-WTI differential.
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