Crude oil prices continued to moderately climb up as they have done during recent weeks. The big news for oil was the sharp increase in the premium of Brent over WTI as the premium reached during the week the highest level since November. Will this premium continue to rise? Let’s examine the oil market the main news items and events that may affect the direction of crude oil prices in the upcoming week.
Here’s a forecast and analysis of the crude oil market for the week of February 13th to February 17th:
Crude Oil Prices – February Update
On Friday, February 10th crude oil price (WTI) declined by 1.17% and reached $98.67/b; Brent oil price also decreased by 0.99% to $117.47/b; during last week, WTI spot oil rose by 0.85% and Brent oil by 2.79%.
In the chart below are the changes of WTI and Brent prices during February (prices are normalized to January 31st). The chart shows the recent rally of Brent and WTI.
The difference between Brent oil and WTI spot oil sharply increased during last week and reached on Friday to $18.80. During February the premium sharply rose by 52.25%. The ongoing tensions between Iran and the West including Iran’s threat to close Strait of Hormuz, where nearly 20% of the world’s crude oil is passing through, might keep contributing to the rise of the Brent premium; from the demand side, the warmer than normal weather in the U.S. and the extreme cold weather in Europe may have caused a higher (than normal for the season) demand for Brent compared with the demand for WTI in the U.S..
During January the correlation between Brent oil price and WTI oil price (daily percent changes) declined to a low level of 0.55 – the lowest level since December. This means that the correlation between WTI and Brent oil prices is still strong but not as it was in January.
The standard deviation of Brent price changed direction and rose during February to its highest level since November 2011. WTI oil price standard deviation declined again to its lowest level in the past year.
According to the recent OPEC monthly report, OPEC oil production remained unchanged during January compared with December’s 2011 oil production levels. IEA revised down again its projection for the global oil demand in 2012. The oil inventories of OECD dropped by 40.8 million bbl. The oil stockpiles are still well below the 5-year average for the sixth consecutive month. These news items may have been among the factors keeping oil prices high and expanding the gap between Brent oil and WTI.
Main Oil Related News Items
Tuesday–German ZEW economic sentiment: For January the ZEW indicator for Germany rose to -21.6 (see here the recent report);
Tuesday–U.S. Retail Sales for January 2012: in the recent report, the retail sales, when controlling for the price changes, slightly increased by 0.1%; gasoline stations sales decreased by 1.6% in December, but were 8.9% above sales in December 2010; this report could signal the changes in U.S’s gasoline demand (see here my review of the recent report);
Wednesday– Euro Area GDP 4Q2011 Report: During the third quarter of 2011, the Euro Area GDP grew by only 0.2% (Q-o-Q). This news might affect the Euro (see here recent report);
Wednesday– Minutes of recent FOMC Meeting: Following the recent FOMC announcement to extend the pledge of keeping the interest rates low until late 2014, the minutes of the meeting might provide some perspective behind this decision regarding the next steps of the FOMC;
Thursday– U.S. Housing Starts: the U.S Census Bureau will publish the U.S housing starts report; in the last report, the adjusted annual rate reached 657,000 in December 2011, which was 4.1% below November’s rate (for the recent review);
Thursday – U.S. Building Permits: The previous report presented a 0.1% decrease (M-o-M) in the adjusted annual rate of building permits as it reached 679,000 in December 2011;
Thursday– U.S. Producer Price Index: This report will present the progress in the PPI during January 2012, i.e. the inflation rate from producers’ stand point. In the last report regarding December this index for finished goods slightly fell by 0.1% compared with November’s rate but rose by 4.8% in the past 12 months; this news might affect commodities markets;
Thursday– Philly Fed Manufacturing Index: In the January survey, the Index moderately rose to +7.3. This index might affect not only the U.S Dollar but also crude oil market (see here last report);
Crude oil Stockpiles – Rose Last Week
U.S. Petroleum and crude oil stockpiles increased during last week by 3.8 million barrels and reached 1,755.6 million barrels. The current oil stockpiles are still 49.035 million barrels below oil stockpiles levels recorded during the same week in 2011.
The upcoming report will come out on Wednesday, February 15th and will refer to the week ending on February 10th.
Forex Exchange Rates Market and Oil Prices – February
The EURO/USD exchange rate slightly increased during last week by 0.30%; the AUD/USD also increased by 1.32%. There are strong linear correlations among leading exchange rates (EURO/USD, AUD/USD, CAD/USD and crude oil prices). I if the U.S dollar will further depreciate against the Euro, Canadian dollar and Australian dollar during the week, it might also pressure up crude oil prices.
The S&P500 index slightly declined during the second week of February by 0.17% to reach 1,342 on Friday; during recent months there were strong positive correlations between crude oil prices and S&P500 index (e.g. during February the correlation with WTI oil price was 0.474 and with Brent oil 0.454).
I speculate, if the American stock market indexes will rise, this will help crude oil price to increase.
Current Crude Oil Prices (February 13th)
Major crude oil prices are currently traded slightly up in the European market:
Nymex crude oil price, short term futures (March 2012 delivery) is traded at $99.55/ barrel, a $0.88/b increase or 0.89%, as of 06:25*.
Brent oil price increases by $0.71/b to $118.19/ barrel as of 06:35*.
Thus, the current premium of Brent over WTI is at $11.87/b.
Crude Oil Prices Forecast and Analysis:
The premium of Brent over WTI continued to rise during last week. This may have been due to the high demand for heating oil in Europe because of the cold weather and the tensions between Iran and Europe. If the cold weather will continue and the tensions regarding Iran will remain high, oil prices will probably maintain their high level, and resulting in further widening the gap between Brent and WTI.
In the upcoming week there are several news items that might affect the direction of crude oil prices including the U.S. retail sales report, minutes of the last FOMC meeting and Philly Fed index. Finally, if major currencies including EURO, CAD and Australian dollar will appreciate against the U.S. dollar, this may positively affect crude oil prices.
I speculate that during the third week of February, WTI oil price will trade in the range of $96-$103 and Brent oil price between $114 and $121.
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