Oil price (WTI and Brent) resumed its rally during last week. WTI oil increased by 1.9%; Brent oil, by 1%. As a result, the gap of Brent oil over WTI slightly narrowed: The premium ranged between $7.16 and $8.43. Last week, the EIA’s weekly report showed a decline in oil’s stockpiles of 2.5 million barrels. Will oil continue to rise? This week, several reports may affect oil prices. These items include: U.S GDP for Q4, U.S core durable good, China’s manufacturing PMI, and EIA oil weekly update.
Here is a weekly outlook for the oil market for February 24th to 28th:
Oil Prices – February Overview
During last week, crude oil price (WTI) increased again by 1.9% and reached by Friday $102.2/b; further, Brent oil increased by 1% to $109.85/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, 2013). As you can see, Brent and WTI oil prices rose in recent weeks.
The difference between Brent and WTI oil narrowed again last week as it ranged between $7.16 and $8.43 per barrel. During the week, the premium dropped by $0.78 per barrel.
The oil stockpiles declined by 2.5 MB and reached 1,729.1 million barrels. The linear correlation between the developments in stockpiles has remained stable at -0.199: this correlation implies that oil price, assuming all things equal, may slightly rise next week. But in order to better understand the fundamentals let’s examine the changes in supply and demand:
Supply: Oil imports declined by 0.4% last week. Conversely, oil production inched up by 0.3%; the total supply remained flat;
Demand: Refinery inputs edged down by 0.1% last week. In total, the demand was lower than the supply, and the gap between supply and demand slightly widened. This current gap may pressure down oil prices as the U.S oil market is moderately looser than it was last week.
The chart below shows the changes in the gap between supply and demand and the price of oil.
The next weekly report will be released on Wednesday, February 26th and will refer to the week ending on February 21st.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Thursday – U.S Core Durable Goods: This monthly report regarding January may indirectly indicate the changes in U.S. demand for commodities such as oil and gas. As of December 2013, new orders of manufactured durable goods decreased to $229.3 billion; if this report shows another fall in new orders, then it could pull down not only the USD but also commodities;
Friday – Second U.S GDP 4Q 2013 Estimate: This will be the second estimate of U.S’s fourth quarter 2013 real GDP growth. In the early estimate, the U.S GDP grew by 3.2% in the fourth quarter of 2013. In the third quarter the GDP grew by 4.1%. If the growth rate in the second estimate rises from the first estimate, this could positively impact not only the US dollar but also commodities prices;
Friday – China Manufacturing PMI: As of January, the Manufacturing PMI slipped to 50.5 – i.e. China’s manufacturing sectors are growing but at a slower pace. If in the upcoming report the PMI falls again, it could signal slowdown in the growth rate in China’s manufacturing sectors, which could also negatively affect oil prices;
Oil Forecast and Breakdown
From the supply, the modest decline in imports was offset by the slight rise in production so that the oil supply remained nearly unchanged. From the demand, refinery inputs inched down again. Further, the storage slipped. In total, the supply was still higher than demand but the gap between the two remained nearly unchanged. This could suggest the oil market has moderately loosened or perhaps just remained unchanged. Looking forward, the upcoming reports regarding U.S and China could offer some additional information regarding the progress in the demand for oil. The gap between Brent and WTI ranged between $7 and $8. The looser oil market in the U.S may further widen the gap between WTI and Brent oil. Conversely, if the US dollar continues to weaken against the Euro, this could pull up oil prices.
The bottom line, on a weekly scale, I guess oil price may slightly come down; the gap between WTI and Brent may slightly narrow.
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