Crude oil prices continued their rally and increased during the week as they have done during most of 2012. The premium of Brent oil over WTI is still around the $18 mark, as the tensions between Iran and Europe remains high. The recent news from this front is that Iran will stop selling oil to British and French companies. This new might reignite the rally of the Brent premium. Will crude oil prices continue their rally during the upcoming week? Let’s examine the oil market the main financial reports, which will come out next week that may affect the direction of crude oil prices.
Here is an outlook and analysis for the crude oil market for the week of February 20th to February 24th:
Crude Oil Prices – February Update
On Friday, February 17th crude oil price (WTI) rose by 0.91% and reached $103.24/b; Brent oil price on the other hand moderately decreased by 0.21% to $121.35/b; during last week, WTI spot oil rose by 0.85% and Brent oil by 2.79%.
In the chart below are the developments of WTI and Brent prices during February (prices are normalized to January 31st). The chart shows the ongoing rally of Brent and WTI.
The difference between Brent oil and WTI spot oil remained nearly unchanged during last week and reached on Friday to $18.11. During February the premium sharply rose by 45.70%. The tensions between Iran and Europe including Iran’s threat to close Strait of Hormuz, where nearly 20% of the world’s crude oil is passing through, continue to keep the Brent premium high; until there will be further developments in the region, the Brent premium will probably continue to be high but won’t increase much.
During February the correlation between Brent oil price and WTI oil price (daily percent changes) slipped to a low level of 0.51. This means the correlation between WTI and Brent oil prices is still strong but not as strong as it was back in January 2012.
The standard deviations of oil prices changed direction and sharply rose during February to their highest level in recent months. This might indicate that both Brent oil and WTI oil prices’ volatility has increased during February.
Main Oil Related News Items
Monday– Monetary Policy Meeting RBA: The minutes of the monetary policy meeting of the reserve bank of Australia may affect the Aussie dollar and consequently crude oil prices (see here last rate decision);
Tuesday–Retails Sales Canada: This report examines the development in the retails sales in Canada during December 2011. It may affect the Canadian dollar (see here the full report);
Tuesday– China Manufacturing PMI: according to the HSBC Manufacturing PMI report regarding December the Manufacturing PMI slightly increased; this index indicates the changes in China’s manufacturing sectors growth rate; if this trend will continue, it may positively affect oil prices;
Wednesday– EU Manufacturing PMI: In the last flash report regarding January 2012, the Euro Zone Manufacturing PMI changed direction and reached 50.4 – a move toward the positive for the first time in five months. This report will provide an indicator to the economic development of the Euro zone’s manufacturing conditions; this news, in turn might affect the Euro and consequently oil prices;
Friday– U.S. New Home Sales: This report will show the developments in new home sales January 2012; in the last report (for December 2011), the sales of new homes increased by 2.2% (M-o-M); if the number of home sales will show an increase in the upcoming report, it may also have an effect on USD and stock and oil prices;
Crude oil Stockpiles – Rose Last Week
U.S. Petroleum and crude oil stockpiles decreased during last week by 3.9 million barrels and reached 1,751.6 million barrels. The current oil stockpiles are still 44.619 million barrels below oil stockpiles levels recorded during the same week in 2011.
The upcoming report will come out on Wednesday, February 22nd and will refer to the week ending on February 17th.
Forex and Oil Prices – February
The EURO/USD exchange rate slightly fell during last week by 0.43%; the AUD/USD on the other hand sharply increased by 2.5%. There are strong linear correlations among leading exchange rates (EURO/USD, AUD/USD, CAD/USD and crude oil prices). If the U.S dollar will depreciate against the Canadian dollar and Australian dollar during the week, it might trade up the price of crude oil.
U.S. Stock Market / Crude Oil Prices – February
The S&P500 index slightly rose during the third week of February by 1.38% to reach 1,361 on Friday; during recent months there were strong positive correlations between crude oil prices and S&P500 index, but during February the correlations between oil and stocks have declined: the correlation of the S&P500 index with WTI oil price is 0.361 and with Brent oil 0.290.
Having said that, I still speculate, if the American stock market indexes will continue to rise, this will also pressure up crude oil prices.
Crude Oil Prices Outlook and Analysis:
The premium of Brent over WTI remained high during last week. The ongoing economic slowdown in Europe as the EU GDP for the fourth quarter shrunk by 0.3% curbed some of the gains of Brent oil; the U.S economy continues to show progress and thus may have helped push up WTI oil price. The tensions between Iran and Europe will probably keep oil price high in the near future.
In the upcoming week there are several financial reports that might influence crude oil traders including the U.S. new home sales report, and China’s manufacturing PMI. If these reports will show progress, it might also pressure up oil prices. 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 fourth week of February, WTI oil price will trade in the range of $98-$105 and Brent oil price between $118 and $124.
For further reading: