Oil prices (WTI and Brent) changed direction and declined last week: WTI decreased by 2.10%; Brent oil, by 2.88%. As a result, the spread of Brent oil over WTI shrank again: The premium ranged between $3.86 and $4.57. The sharp fall in Libya’s oil exports is likely to keep the spread from further contracting. According to the latest EIA weekly update, oil stockpiles rose by 4.087Mb. In the U.S, imports, refinery inputs and production increased during last week. Will oil change direction again and this time rally next week? This week, several reports and events may affect the oil market. These items include: FOMC meeting, U.S’s industrial production, Philly Fed index, and EIA oil weekly report.
Here is a weekly outlook and analysis for the oil market for September 16th to 20th:
Oil Prices – September
During last week, crude oil price (WTI) fell by 2.10% and reached by Friday $108.21/b; further, Brent oil also decreased by 2.88% to $112.78/b;
In the chart below are the daily changes in WTI and Brent oil prices during the year (prices are normalized to January 31st). As seen in the chart, the oil changed direction and fell last week.
The gap between Brent and WTI oil slightly shrank last week as it ranged between $3.86 and $4.57 per barrel. Moreover, during the week, the premium decreased by 18.25%.
The oil stockpiles rose again by 4.087 MB and reached 1,821.3 million barrels. The linear correlation between the changes in stockpiles has remained stable at -0.196: this correlation suggests that oil price, assuming all things equal, will fall next week.
Oil imports to the U.S rose again by 0.3% last week. The weekly shifts in oil imports have a mid-strong negative correlation (-0.262) that implies oil price may decline again next week. Moreover, oil production also slightly increased; refinery inputs also rose by 0.4% last week. In total, the rally in production, refinery inputs and imports might further loosen the U.S oil market.
The next weekly update will be published on Wednesday, September 18thand will refer to the week ending on September 13th.
Middle East and Oil – The tensions keep oil prices up
The decline in possibility of U.S intervening in the Syrian crisis may have also eased some of the concerns in the Middle East and its effect on oil prices. I still think these concerns are a bit overblown and oil prices might keep falling in the coming weeks. Libya’s drop in oil exports to only 150k of barrels a day – in 2010 this country produced 1.6 million barrels a day, may have also contributed to the rally of oil prices and the rise in the spread between Brent and WTI. The upcoming OPEC report could shed some additional light about the changes in Libya’s exports and production. If Libya’s oil exports remain low, it could keep Brent oil price above $110 and the spread between Brent and WTI closer to $10.
OPEC’s Production Fell in August
According to OPEC’s recent report, the production fell by 0.256 mb/d and reached 30.234 mb/d. This drop in mostly due to Libya’s decline in production that fell from 1 mb/d to 0.529 mb/d. Conversely, Saudi Arabia and Iraq increased their production, which helped curb the decline in production. This recent fall in production may have contributed to the rise in oil prices.
IEA Monthly Report
The IEA showed in its recent monthly update that global supply has fallen by 0.77 mb/d during August – due to drop in OPEC and non-OPEC countries’ supply. On the other hand, the forecast for global demand growth in 2013 hasn’t changed.
Oil Related News for the Week
Wednesday – FOMC Meeting: The FOMC will decide whether it will taper QE3. Many analysts expect the FOMC to start taper its long term treasury bonds purchase program. If the Fed only reduces QE3, it is likely to drag down oil prices. If the Fed doesn’t introduce any changes to its monetary policy, oil prices might rally. In any case, the FOMC’s statement, outlook and press conference that follow are likely to move commodities markets;
Thursday – Philly Fed Manufacturing Index: In the latest survey regarding August, the growth rate fell from +19.8 in July to +9.3 in August. If the index continues to slowdown, it may positively affect not only U.S Dollar but also U.S equity markets and commodities (the recent Philly Fed review);
Oil Price Outlook and Breakdown
From the supply side, the ongoing rise in refinery inputs, production and imports could pull down oil price. The U.S oil storage rose again last week; this is another signal for an increase in supply or a decline in demand; this, in turn, may suggest the U.S oil market has loosened. From the demand side, next week’s reports including U.S industrial production, and Philly Fed index could signal the potential developments in the demand for oil in U.S. If these reports surpass current market expectations, they could positively affect the price of oil. The upcoming FOMC meeting could affect the USD, which, in turn, may also affect the oil market: If the Fed tapers QE3, this could adversely affect oil prices. The spread between Brent and WTI may remain around the $4-$5. Finally, the fundamentals suggest oil prices should decline again in the near future, even though the tensions in the Middle East will keep oil prices elevated.
The bottom line, on a weekly scale I guess oil price will fall (providing of course there won’t be a sudden escalation in the Middle East (including Syria, Libya, Egypt and Iran).
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