Oil price (WTI and Brent) rose again last week: WTI increased by 1%; Brent oil, by 0.37%. As a result, the gap of Brent oil over WTI slightly narrowed: The premium ranged between $11.86 and $12.68. Last week, the EIA’s weekly report presented another decline in oil’s stockpiles by 12.7 million barrels. Will oil continue to recover? This week, several reports may affect oil prices. These items include: U.S manufacturing PMI, China’s manufacturing PMI and EIA oil weekly update.
Here is a weekly outlook and analysis for the oil market for December 30th to January 3rd:
Oil Prices – December Overview
During last week, crude oil price (WTI) rose again by 1% and reached by Friday $100.32/b; further, Brent oil increased by 0.37% to $112.18/b;
In the chart below are the daily shifts in WTI and Brent oil prices during the past several months (prices are normalized to January 31st). As seen below, Brent and WTI oil prices rallied in recent weeks.
Premium of Brent over WTI – December
The gap between Brent and WTI oil slipped last week as it ranged between $11.86 and $12.68 per barrel. During the week, the premium declined by $0.59 per barrel.
Oil Stockpiles, Demand and Supply
The oil stockpiles deceased again by 12.7 MB and reached 1,756.4 million barrels. The linear correlation between the changes in stockpiles has remained stable at -0.204: this correlation suggests that oil price, assuming all things equal, may further rise next week. But in order to better understand the fundamentals let’s examine the developments in supply and demand:
Supply: Oil imports decreased by 0.6% last week. Moreover, oil production rose again by 0.3%; the total supply decreased by 0.1%;
Demand: Refinery inputs rose again by 1.1% last week. In total, the demand was higher than the supply. Thus due to the sharp rise in demand and the decline in supply, the gap between supply and demand further expanded. This gap may pull up oil prices as the U.S oil market continues to tighten.
The chart below shows the changes in the gap between supply and demand and the price of oil.
If U.S oil market continues to tighten, as it did in the past several weeks, this could further pull up oil price.
The next weekly report will be released on Friday, January 3rdand will refer to the week ending on December 27th.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Wednesday – China Manufacturing PMI: As of November, the Manufacturing PMI remained flat at 51.4 – i.e. China’s manufacturing sectors are expanding. If in the upcoming report the PMI starts to fall, it could signal slowdown in the growth rate in China’s manufacturing sectors, which could also negatively affect oil prices;
Thursday – U.S Manufacturing PMI: During November, the index rose again to 57.3% – the highest level in the past couple of years; this means the manufacturing is growing at a faster rate; this index may affect crude oil prices;
Oil Forecast and Breakdown
From the supply standpoint, the ongoing drop in imports is likely to further pressure up oil prices. On the other hand, the steady increase in production could offset some of the positive effect the drop in oil imports have on prices. In total, the supply slightly shrank last week. From the demand standpoint, refinery inputs continue to augment. As a result, the storage declined again. Further, the difference between supply and demand has widened so that the demand remains elevated over the supply; this could suggest the oil market has tightened again. Looking forward, the upcoming reports regarding U.S and China could offer some additional insight regarding the changes in oil demand in these countries. The difference between Brent and WTI ranged between $11 and $12 range. The tight oil market in the U.S is likely to pressure further up the WTI closer to the Brent oil. On the other hand, if the US dollar continues to strengthen, this could curb down the recovery of oil prices.
The bottom line, on a weekly scale, I guess oil price may resume its upward trend and the gap between WTI and Brent will further shrink.
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