After a brutal week, prices look set to regain some of their lost ground. Last week’s What’s Affecting Oil Prices inaccurately gauged the effect sentiment would have on prices in the face of a relatively neutral EIA Weekly Petroleum Status Report. While last week’s WAOP saw prices potentially testing $50, prices actually closed at $47.73.
While sentiment is unlikely to suddenly reverse next week, fundamentals continue trending in the right direction and we expect prices to see some support off of last week’s lows. Therefore we expect prices to rise next week, potentially testing $48.50 on a strong enough mid-week report. The supporting rationale for the forecast is provided below.
Despite the flurry of news about the ongoing Russia investigation, there is little on the international stage that is of immediate concern. The Qatar dispute continues but there has been no escalation in the conflict. In Libya, all major oil fields appear to be operating.
However, there are reports that the rival eastern NOC has issued an order for Glencore to halt exports out of the port of Hariga. The eastern NOC is a parallel operator to the more internationally recognized National Oil Corp but it is more closely aligned with General Kahlifa Haftar, the military commander whose forces have secured much of the eastern oil infrastructure. While there is no current disruption, the possibility that this escalates into another stoppage is well within the realm of possibility.
Therefore, we think geopolitics will be a neutral factor in regards to the oil price this week.
The dollar rallied last week on the back of a hawkish FOMC meeting but then softened toward the end of the week on disappointing housing data, ending the week practically where it started. Emmanuel Macron’s enormous victory in Parliament over the weekend is likely to provide some support for the Euro, but this week’s Brexit negotiations could lead to some volatility in currency markets more generally. Based on recent market moves, the weight of fundamentals and sentiment on crude prices is likely to outweigh any currency impacts this week.
Therefore, the dollar is likely to be a neutral factor on prices next week
Trader Sentiment: Neutral
Sentiment will continue to weigh heavily on crude prices. The last several weeks have seen traders move heavily against crude as concerns about stubborn global oversupply dominate. The week of June 5 saw a 30% increase in managed money short positions, dropping net long positions from 221,240 contracts to 195,298. As prices have dipped, however, we expect traders to begin closing those positions for fear of being caught as prices reverse course.
At this stage we do not expect major moves on sentiment as the market waits to see how the last fundamentals play out, with the EIA report once again in focus.
Therefore, we believe trader sentiment will be a neutral factor this week.
Last week the number of operating oil rigs in the United States increased by six, according to the weekly report from Baker Hughes. This marks the 22nd straight week of increases although the pace of increases does appear to be slowing. US oil rigs now stand at 747 compared to 337 at the same time last year. In the latest weekly numbers from the US, estimated domestic crude production edged up by 12 Mb/d. With few supply stories and another potential outage in Libya on the horizon, it is our view that supply will be a neutral factor next week.
Last week’s product-supplied numbers were actually positive, with gasoline and distillate demand aligning with expectations. ARA stocks reported a build last week as middle/heavy distillates increased slightly and light ends fell. Reports of the US-Europe diesel arbitrage being active and open should help to support market perception of healthy demand.
Therefore we expect demand to be a positive factor this week.
Refining margins were flat to down across the globe. US refinery margins are beginning to see some weakness as product stocks remain high. In the United States especially, weakening margins should eventually result in lower runs and decreasing product oversupply. However, the availability of product arbitrages is likely to push US refiners to continue to run at high levels in the hopes of exporting excess product. And given the key role the EIA report plays in moving market sentiment, we expect refining to have a positive impact on crude prices this week.
For the upcoming week, we are expecting that crude inventories will decrease between 2.5 and 3.5 million barrels as US crude runs remain stable. We also expect the Brent-WTI differential remain relatively stable, trading between $2.40 and $2.90 with respect to the August contract.