What’s Affecting Oil Prices This Week (Aug. 7, 2017)?

In the week since our last edition of What’s Affecting Oil Prices, Brent crude fell 13 cents per barrel (bbl) week-close to week-close. For the week ahead, we expect prices to average $52/bbl as there is unlikely to be strong momentum until the end of the week, when the IEA and OPEC monthly reports are released. The supporting rationale for the forecast is provided below.

Geopolitical: Neutral

Geopolitics, as it relates to oil, remains fairly uneventful and therefore unlikely to play a large part in oil prices this week, barring a surprise development. While the ongoing situation in Venezuela bears watching, so far the White House has declined to pass any industrywide sanctions that would have an immediate impact on oil.

Dollar: Neutral

Given the substantial impact on prices from fundamentals and sentiment, the DXY and the USD/EUR exchange rate are still not as impactful as they have previously been. The USD saw some support from a strong jobs report last week and is at a key technical support level as well.

Trader Sentiment: Neutral

Trader sentiment will be a neutral factor in the week ahead as Brent continues to hover just outside of overbought territory. Brent’s Relative Strength Index is at 63.78, with 70 being the traditional overbought line. Traders will likely remain sensitive to any negative fundamental data, especially in the IEA report due Friday. NYMEX and ICE both reported that WTI Managed Money net longs increased last week and ICE Brent Managed Money net longs also increased. For WTI, this improvement was driven more by increased long positions than just a decline in shorts while the improvement in ICE Brent was caused more so by a drop in Managed Money short positions.

Supply: Negative

Last week the number of operating oil rigs in the US decreased by one, according to the weekly report from Baker Hughes. U.S. oil rigs now stand at 765, compared to 381 at the same time last year. In the latest weekly estimates from the US, domestic crude production reversed last week’s estimated decline, growing 20 Mb/d. This week’s OPEC and IEA monthly oil reports are likely to confirm initial estimates of rising OPEC production, which will weigh on prices in the back half of the week. Markets will also be closely watching the results of this week’s joint OPEC/non-OPEC meeting to discuss the state of the crude quotas and overproduction.

Demand: Positive

Demand remains a bright spot supporting crude prices. In the US, gasoline demand is above the five-year max and inventories have been steadily falling. Distillate demand is also well above the five-year range on a 4wma basis. Gasoline and distillate stocks both fell last week. ARA total product stocks fell with only gasoline building slightly and all other products seeing draws.

Refining: Positive

Margins fell almost across the board last week, but remain elevated enough to incentivize runs. In the US, the WTI crack at the Gulf Coast hit another new high, reaching $14.07/bbl while the Brent crack fell to $8.75/bbl. US crude inputs rose last week and will likely grow again this week, supporting crude demand. In Western Europe, cracks retreated sharply but are nowhere near the year’s lows. Cracks were also down in Asia, after reaching highs last week.

For the upcoming week, we expect crude inventories to see draw in line with seasonal norms. Crude stocks in the U.S. are expected to fall approximately 1 million to 2 million barrels as runs steady near a seasonal peak. We also expect the Brent-WTI differential will increase slightly as Brent’s gains outpace WTI’s; the differential will likely trade around $2.50/bbl in the week ahead.