Oil price (WTI and Brent) changed direction and rose last week: WTI spiked by 5.32%; Brent oil, by 1.75%. As a result, the gap of Brent oil over WTI contracted: The premium ranged between $13.6 and $17.63. Last week, the EIA’s weekly update presented a drop in oil’s stockpiles by 7 million barrels. In the latest OPEC summit, the production quota will remain unchanged at 30 million barrels per day. OPEC projects the rise in oil demand in 2014 will be covered by non-OPEC supply. Will oil continue to rally next week? This week, several reports and meetings may affect oil prices. These items include: U.S retail sales, China and German industrial production, OPEC and IEA monthly reports, and EIA oil weekly update.
Here is a weekly forecast and analysis for the oil market for December 9th to December 13th:
Oil Prices – December Overview
During last week, crude oil price (WTI) change direction again and rallied by 5.32% and reached by Friday $97.65/b; further, Brent oil also increased by 1.75% to $111.61/b;
In the chart below are the daily changes 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 bounced back last week.
The gap between Brent and WTI oil also changed direction and fell last week as it ranged between $13.6 and $17.63 per barrel. During the week, the premium fell by $3.01 per barrel.
The oil stockpiles declined again by 7 MB and reached 1,786.5 million barrels. The linear correlation between the changes in stockpiles has remained stable at -0.208: this correlation implies that oil price, assuming all things equal, may further increase next week. But in order to better understand the fundamentals let’s examine the shifts in supply and demand:
Supply: Oil imports sharply increased by 1.9% last week. Moreover, oil production slightly rose by 0.5%; the total supply increased by 1.2%;
Demand: Refinery inputs sharply rose by 1.7% last week. In total, the demand is still lower than the supply. Despite the sharper rise in demand compared to supply, the gap between supply and demand is still positive. Nonetheless, the difference has contracted – this may keep the recent upward trend of oil prices as the U.S oil market continues to tighten.
The chart below presents the shifts in the gap between supply and demand (below zero: Demand is above Supply; above zero: Supply is above Demand).
As seen above, the currently loose oil market in the U.S coincides with the decline of oil price in recent weeks. But if U.S oil market continues to tighten, as it did in the past several weeks, this could eventually pull up oil price.
The next weekly report will be released on Wednesday, December 11th and will refer to the week ending on December 6th.
OPEC Monthly Report
OPEC will release its monthly update on the main developments in crude oil and natural gas’s supply and demand worldwide; the report will also refer to the shifts in the production of OPEC countries during November 2013.
The next report will be published on Tuesday, December 10th.
IEA Monthly Report
This upcoming monthly update will present an updated (for November) outlook and analysis for the global crude oil and natural gas market for 2013and 2014.
The next report will be published on Thursday, December 12th.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday – German Industrial Production: The next report will refer to November 2013. In the previous update, the industrial production changed course and fell by 0.9% during October;
Tuesday – China’s Industrial Production: Based on the previous month’s report, China industrial production slightly rose to an annual rate of 10.3%; if the growth rate further rises, it may suggest China’s economy is progressing faster;
Thursday –U.S. Retail Sales Report: This monthly report refers to November; in the last report regarding October, retail sales slightly rose by 0.2% (month-over-month); core retail sales rose by 0.4%; this report also shows the changes in U.S’s gasoline retail sales, which could suggest the shifts in demand for gasoline;
Oil Outlook and Breakdown
From the supply side, the ongoing increase in imports and oil production is likely to curb down the rally of oil prices. OPEC’s meeting resulted in no significant changes. The upcoming OPEC and IEA monthly reports will show of any changes to supply of OPEC and non-OPEC supply. From the demand side, refinery inputs rose again by a higher pace than the supply did. As a result, the storage fell again. Moreover, the difference between supply and demand has narrowed due to this trend; this could imply the oil market has tightened again. But as long as the difference remains high – demand is lower than the supply – oil prices aren’t likely to remain high. Looking forward, the upcoming reports regarding U.S China and Europe could offer some additional insight regarding the progress of these economies. The difference between Brent and WTI ranged between $13 and -$17 range. The cool down the Middle East and the tightening of the U.S oil market could narrow the gap between Brent and WTI. Nonetheless, the loose oil market in the U.S is likely to keep the WTI lower than Brent oil. Moreover, if the USD continues to depreciate, this could positively affect oil price.
The bottom line, on a weekly scale, I guess oil price may continue its upward trend.
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