Prior to the beginning of last week, Stratas Advisors forecast that the price of Brent crude would trade between $55 per barrel (bbl) and $56/bbl. The forecast was based on the expectation that oil traders were shifting to a more bearish sentiment. Furthermore, other key factors--geopolitics, the U.S. dollar, supply, demand and the refining sector--were expected to be neutral with respect to price of Brent crude. Our forecast proved to not be sufficiently pessimistic.
The price of Brent crude started the week at $55.90/bbl, then starting declining with a significant drop-off on March 8 to $53.11/bbl. It continued to decline through the remainder of the week to close at $51.37/bbl. The price of Brent crude is now at the lowest level since November of 2016.
The price drop-off was precipitated by the substantial rise in U.S. crude inventories, which the Energy Information Agency (EIA) said increased 8.21 MMbbl during the previous week.
The downward pressure was reinforced by Saudi Energy Minister Khalid Al-Falih, who stated that OPEC would not bear the burden of reducing production for non-OPEC producers to reap benefits.
Moreover, neither OPEC nor Saudi Arabia would underwrite others’ investments through the maintenance of production cuts. Pointedly, the energy minister mentioned that the U.S. oil and gas sector would be one of the beneficiaries of efforts to reduce global market volatility.
We also forecast that the Brent-WTI differential would trade between $2.00 and $2.50. Our forecast was in line with the actual results. The Brent-WTI differential started the week at $2.12, widened on March 8 and stayed relatively unchanged through the remainder of the week to close at $2.34.
For the upcoming week we are forecasting that the price of Brent crude will continue to be under pressure with support at $50.90/bbl. We are also expecting that the Brent-WTI differential will continue to trade between $2.00 and $2.50 with respect to the May contract.
Supporting rationale can be found here.