The Week In Hindsight, 01 August 2014

Both Brent and WTI Crude fell over the course of the last week, despite stronger economic data and a global risk environment which is still conducive to higher prices. The catalyst for the downward leg in both benchmarks was the Energy Information Agency’s weekly petroleum report (North America), which was released on Wednesday a short time after US GDP numbers.   

According to the report North American (NA) inventories, while reducing, are at above average levels for this time of year. Although imports from international markets rose over the period, higher inventories and increasing NA production are likely to offset the effects of growth in demand over the weeks and months ahead.

Consequently, save for a serious disruption to international markets, the above dynamics are likely to keep North American prices anchored for some time. Given the subsequent lack of NA demand in international markets, the above dynamics could also weigh on other benchmarks such as Brent.

In addition to reduced North American demand, rising supply elsewhere is likely to further constrain Brent prices over the weeks and months ahead. Recent increases in OPEC output reinforce this view, although admittedly much of this has been driven by a recovery in Libyan production which is far from secure.

Overall, the effects of 2014’s surge in geopolitical tensions appear to have faded and traders now appear to be focusing once again on more traditional supply and demand dynamics. Given the current supply side landscape, both WTI and Brent Crude are likely to remain biased toward their current low levels of $97 and $103/104 respectively.

The obvious exception to this would be a scenario where sanctions against Russia tighten drastically and the prospect of a further reaching retaliation from Moscow becomes more real.  

Brent/WTI (Black) 10 Minute Intervals



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