AEGIS Factor Matrices: Most important variables affecting oil prices

Demand Recovery. The global demand recovery remains one of the most heavily forecasted and heavily watched factors affecting oil markets right now, and data from governments and industry groups have suggested that demand may be recovering quicker than anticipated. However, the acceleration of new COVID-19 outbreaks, largely related to the so-called Delta Variant, have made the pace of demand growth again uncertain. 

OPEC is watching demand closely, to match supply to it, and keep global inventories drawing down at a reasonable pace. In a perfect world, the cartel would try and match demand growth with supply on a 1:1 basis, given they have the spare capacity. Still, many analysts' forecasts show that the cartel lacks the spare capacity needed to accomplish this, which may eventually leave room for non-OPEC supply growth. With the forecasted slowdown in new shale supply, demand will be driving price action, and OPEC is poised to be in the driver's seat for now.

We consider this factor to be bullish, but somewhat priced-in. Disappointments could be coming, where the market expected demand growth at a rate that does not happen. 

OPEC+ Quotas. Under the current deal, OPEC+ has an estimated 5.8 MMBbl/d of supply on the sidelines as of July 2021. The group has increased output by 2 MMBbl/d since April; however, the additional supply has had little negative impact on prices.

The group failed to reach a consensus during its latest ministerial meeting. According to Reuters, the UAE had held the deal hostage to increase its own baseline production by 700 MBbl/d, and it seems to have worked. The UAE was granted permission to increase its baseline level from 3.2 MMBbl/d to 3.65 MMBbl/d, however the total OPEC+ baseline increased by 1,630 MBbl/d. We moved this factor to the left to show that it has become more neutral.

USD. After months of inflationary concerns, the Fed took a more "hawkish" tone in its recent FOMC meeting on June 15, which prompted a sell-off in commodity markets and a rally in the U.S. dollar. Since the June 15 meeting, the dollar index has held its gains and even pushed higher, which has worked against crude prices. This factor could be bearish or bullish, depending on your view. Suppose you think that the dollar will hold its gains and continue to strengthen as the Fed takes action to limit inflation. In that case, it could serve as a bearish surprise, or if you think the rally will reverse and continue along with its multi-month downward trend, you could place it as a bearish surprise. We moved this factor to the left, closer toward neutral, as the dollar seems to have broken its multi-month downtrend, adding more uncertainty regarding its impact on crude prices moving forward.

Iran. The U.S. and Iran have been holding indirect talks to revive the JCPOA agreement voided by the Trump administration. A temporary atomic monitoring pact used as a stopgap measure to allow for broader negotiations expired on Thursday, June 24.  Iran has refused to extend the monitoring pact, which has caused talks to stagnate. All parties were supposed to convene for the seventh round of negotiations; however, they have since been canceled and the next round of talks has not been scheduled.

The country also held its presidential election on June 18, which resulted in Ebrahim Raisi replacing the more moderate Hassan Rouhani. The president-elect is sanctioned by the U.S. and has downplayed the importance of the agreement. We believe that the return of Iranian barrels remains a threat to oil prices, which is why we have this factor as a bearish surprise.

Trend. The prompt-month contract saw its largest loss in over four months during the week ending July 16. WTI has managed to remain in an uptrend for 35 weeks, its longest ever, however the pace of the rally has slowed and may be a sign of weakness. We moved this factor closer to neutral to show that the trend has lost some steam.

COVID-19. COVID-19 is still weighing on demand, and the economy at-large. Although it seems that the oil market has shrugged off the impact over the last several weeks, concerns over re-openings and the economic recovery hit many markets hard during the July 19 trading session.

India was battling a new surge in COVID cases. However, the pronounced effect on transportation fuels for the world's third-largest crude importer has largely dissipated. It seems demand increases in countries with effective vaccination programs have outweighed most COVID-19-induced demand losses elsewhere.

In recent weeks, the more contagious Delta Variant has forced several countries to re-impose lockdowns and travel restrictions to mitigate the spread. For this reason, we moved this factor up to show it has more potential to weigh on prices. We have this factor on our Factor Matrix as bearish and priced-in as we believe that this factor's impact on price is diminishing.

Product S&Ds. Vaccination rollouts in the U.S. and around the globe continue to gain traction. More bullish crude product demand recovery estimates are trickling in every day, as new data hints at a strong recovery. If the pace of the demand recovery continues, then crude demand could reach pre-pandemic levels much quicker than anticipated.

The supply and demand balance for most refined products has been very strong, explaining the high crack spreads and product prices. Gasoline prices are near their highest sustained level since October 2014 and ULSD at its highest since September 2019. We have this factor as bullish and slightly priced in.

Non-OPEC Production. This factor represents the risk of non-OPEC producers adding supply in response to higher oil prices. Increased supply would be outright bearish or weaken other bullish factors. Additionally, OPEC likely considers non-OPEC production in its own supply policy. As recently as the May edition of OPEC's MOMR report, the cartel forecasted non-OPEC growth of a mild 700 MBbl/d in 2021, even with U.S. crude production falling. In the upper left quadrant, this factor is a potential bearish surprise.

U.S. Production. We have this factor as a bearish surprise to reflect the risk that U.S. producers may decide to capitalize on higher prices and begin to increase supply. OPEC, the EIA, and the IEA have U.S. production pegged to decline; Still, prices above $55 through 2024 may be enough to draw capital from the sidelines to grow U.S. production.

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