Prior to the beginning of last week Stratas Advisors expected that the price of Brent crude oil would test the $50 level. The expectation was based, in part, on the upward pressure resulting from the disruption to the supply of crude oil associated with Canada because of the outbreak of wildfires, and Nigeria, because of because of militant attacks on platforms and pipelines. Meanwhile the firm expected the upward price movement would be moderated by the shift in the sentiment of oil traders away from bullishness and the strengthening of the U.S. dollar. The actual price movements aligned closely with the firm’s expectations. The price of Brent crude started the week at $47.83 then reached $49.28 before falling back to close the week at $48.72. In the second half of the week, downward pressure was put on the price of Brent crude oil by an increase in the U.S. inventories of crude oil (in comparison with the expectation for a drawdown in inventories of crude oil) and the strengthening of the U.S. dollar.

Stratas Advisors also expected that the Brent-WTI differential would trade between 65 cents and $1.40 with respect to the July contract. In actuality, the Brent-WTI differential narrowed more than expectations. The Brent-WTI differential started the week at 93 cents, and then narrowed throughout the week to close the week at 31 cents.

At the beginning of last week Stratas Advisors expected that the price of Brent crude would trade between $47 and $49 during the first part of the week, and then move toward $50 later in the week. The outlook was based on the expectation that the EIA would report that crude inventories in the U.S. had declined between 3.5 and 4.5 million barrels, which would provide a boost to the price of Brent crude in the second half of the week—and would offset the downward pressure from the strengthening U.S. dollar.

The actual price movement tracked closely with our expectations. The price of Brent crude started the week at $48.72 then went to $49.74 on Wednesday and then stayed essentially unchanged to close the week at $49.76. The firm also expected that the Brent-WTI differential would trade between 5 cents and 45 cents with respect to the July contract. In actuality, the Brent-WTI differential started the week at 31 cents then declined through the week before widening on Friday to close the week at 15 cents.

So where does this leave Stratas Advisors and the accuracy of its Short Term Outlook? In January of this year, the firm released the forecast shown below and compared it to the average price for the first half of 2016. The prediction for the 1Q 2016 average was $34.96 vs. an actual average of $34.50—a differential of only 46 cents. In January, when releasing its initial forecast, Stratas analysts assembled a series of four alternative scenarios to best understand the amplitude of potential pricing outcomes. They are shown below when compared to the average price for the first half of 2Q 2016.

  • Minor Supply Disruption: A drop of roughly 500,000 barrels per day of supply out of the global market, such as a faster than expected drop in U.S. shale, an under-performing Iran or a slow-to-restructure Libyan government;
  • Major Supply Disruption: A drop of roughly 2 million barrels per day (MMbbl/d) of supply out of the global market, such as a hot war between Saudi Arabia and Iran, the collapse of the Venezuelan government or a large cut from OPEC;
  • China Falls: A drop of 500 MMb/d of demand due to an under-performing Chinese economy;
  • Global Recession: Declining global demand due to a recession combined with an unrelenting OPEC.

As of today, with Brent crude prices above $49, our outlook is beginning to follow the "Minor Supply Disruption" trend, reinforcing not only the viability of our scenarios but the effectiveness of our internal models.

For the upcoming week Stratas Advisors expects that the price of Brent crude oil will remain relatively flat with the ceiling at $50. Additionally, the firm is forecasting that the Brent-WTI differential will trade between $5 cents and 30 cents with respect to the August contract. The last day for the July contract of Brent crude is May 31.

Read the full rationale supporting this outlook.