Geopolitical uncertainty has increased with the terrorist attack that occurred in Nice, France, and the attempted coup in Turkey.
Stratas Advisors’ Geopolitical Team believes that the coup attempt may only be the beginning of a period of instability for Turkey.
The overriding interests of the U.S. vis-à-vis Turkey are maintaining the stability of the country to prevent the further expansion of the Islamist extremist epidemic into the EU and improving Turkish cooperation in the conflict against the Islamic State and Al Nusra in Iraq and Syria, however painstakingly.
The coup attempt has created additional uncertainty about the supply of crude with concerns about possible interruption of crude flows through the Bosporus and the Dardanelles. Consequently, Stratas Advisors is shifting its view that geopolitics will be a neutral factor to a positive factor with respect to the price of Brent crude.
Supply-and-Demand
Also last week, as expected, the demand situation became less constructive for the price of Brent crude.
The increase in product inventories occurred even though crude inputs to refineries decreased by 143,000 bbl/d in comparison with the previous week, and 281,000 in comparison with the same time period last previous year. The fragility of the supply/demand situation in the Atlantic Basin is further illustrated by the increase in product inventories in northwest Europe.
Because of the inventory situation Stratas is shifting its view that demand will be a neutral to negative factor with respect to the price of Brent crude.
Forecast
Prior to last week Stratas expected a substantial decrease in crude inventories in the U.S. in the order of 6 MMbbl. In actuality, inventories of crude decreased, but by only 2.55 MMbbl.
The firm also forecast that the Brent-WTI differential would trade between 40 cents and 85 cents with respect to the September contract. In actuality, the Brent-WTI differential started the week at 64 cents then increased through the week, to close the week at 96 cents.
The less-than-favorable EIA inventory report, coupled with the support the price of Brent crude received from the news of the attempted coup in Turkey, supported the widening of the Brent-WTI differential.
For the upcoming week, Stratas expects that crude inventories in the U.S. will decrease between 3 MMbbl and 4 MMbbl. The firm also expects that the Brent-WTI differential will trade between 50 cents and $1.10 with respect to the September contract.
For more analysis, including the effects of rig counts, the U.S. dollar and refining margins, visit StratasAdvisors.com.
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