Crude oil continued to trade up as Brent oil and WTI oil sharply rose during last week. The premium of Brent oil over WTI slipped to the $17 mark. Will crude oil prices continue to trade up during the upcoming week? Let’s examine the oil market and the main financial reports that may affect the path of crude oil prices.
Here is an outlook and analysis for the crude oil market for the week of February 27th to March 2nd:
Crude Oil Prices – February Update
On Friday, February 24th crude oil price (WTI) increased by 1.86% and reached $109.49/b; Brent oil price also increased by 0.53% to $126.65/b; during last week, WTI spot oil rose by 6.05% and Brent oil by 4.37%.
In the chart below are the changes in WTI and Brent prices during February (prices are normalized to January 31st). The chart shows the ongoing upward trend of Brent and WTI.
The gap between Brent oil and WTI spot oil declined during last week and reached by Friday $17.16. During February the premium sharply rose by 38.05%. The tensions between Iran and Europe including Iran’s threat to close Strait of Hormuz, where nearly 20% of the world’s oil is passing through, is keeping the Brent premium high; until there will be further developments in the region, the Brent premium will probably remain high but probably won’t rise any further.
During February the correlation between Brent oil price and WTI oil price (daily percent changes) declined to a low level of 0.41 – the lowest level since November 2011. This means the correlation between WTI and Brent oil prices is still strong but not as strong as it was in recent months. This figure coincides with the rising gap between Brent and WTI.
The standard deviations of oil prices sharply rose during February to their highest level since October 2011. This might indicate that both Brent oil and WTI oil prices’ volatility has sharply increased during recent weeks.
Main Oil Related News Items
Monday– Euro Area Monetary Development: If the M1, M3 and private loans will continue to decline it could serve as another indicator for the slowdown in the Euro Area’s economic activity, and thus may affect the upcoming ECB interest rate decision (see here the last report);
Monday– U.S. Pending Home Sales: in the December report the pending home sales index decreased by 3.5%. These data are another indicator for the shifts in America’s real estate market;
Tuesday– U.S Core Durable Goods: This report may indirectly present the changes in U.S. demand for crude oil. According to a flash estimate for December 2011, manufactured durable goods sharply rose by $6.2 billion to $214.5 billion;
Tuesday– U.S Consumer Confidence: according to the previous report, the consumer confidence index edged down in January; this report might affect commodities market;
Wednesday – Second U.S GDP 4Q 2011 Estimate: This will be the second estimate of U.S’s Q4 2011. In the first estimate for 4Q the GDP growth rate was 2.8%. If the growth rate in Q4 will be higher than in the first estimate it could have substantial influence on forex and commodities traders;
Wednesday – China Manufacturing PMI: during January the Manufacturing PMI rose to 50.5; this index indicates the changes in the growth rate of China’s manufacturing sectors; if this trend will continue, this might positively affect oil prices;
Thursday – U.S. Jobless Claims: initial claims remained unchanged at 324,000 claims for the week ending on February 17th; the upcoming weekly update might affect commodities markets;
Thursday– U.S. ISM Manufacturing PMI: During January the index rose to 54.1%; this index might affect crude oil markets (see here my review of last report);
Crude oil Stockpiles – Rose Last Week
U.S. Petroleum and crude oil stockpiles rose during last week by 3.2 million barrels and reached 1,754.87 million barrels. The current oil stockpiles are still 29.281 million barrels below oil stockpiles levels recorded during the same week in 2011.
The upcoming report will come out on Wednesday, February 29th and will refer to the week ending on February 24th.
Forex and Oil Prices – February
The EURO/USD exchange rate sharply increased during last week by 2.35%; the approval of the EU rescue package to Greece was probably among the factors helping pulling up the Euro. On the other hand the AUD/USD slightly decreased by 0.13%. There are strong linear correlations among leading exchange rates (EURO/USD, AUD/USD, CAD/USD and crude oil prices as seen in the chart below). If the U.S dollar will further depreciate against the EURO, Canadian dollar and Aussie dollar during the week, it might help trade up crude oil.
The S&P500 index slightly increased during the fourth week of February by 0.33% to reach 1,365 on Friday; during recent months there were strong and positive correlations between crude oil prices and S&P500 index, but during February the correlation between oil and U.S. stocks index has decreased: the correlation of the S&P500 index with WTI oil price is 0.282 and with Brent oil 0.286 – their lowest level in recent months.
Having said that, I still speculate, if the American stock market indexes will continue to trade up, this will also coincide with the rally of crude oil prices.
The premium of Brent over WTI slightly decline during last week, but it is still high. The cold front in Europe which probably led to an increase in the demand for heating oil on the one hand and the low stockpiles of the OECD industry, which are well below the 5-year average, may have helped trade up crude oil. The U.S economy continues to show progress and thus may have push up WTI oil price. The tensions between Iran and Europe will probably keep oil price high in the weeks to come.
In the upcoming week there are several financial reports that might affect crude oil prices including the U.S manufacturing PMI, core durable goods report, and China’s manufacturing PMI. If these reports will show progress, it might trade up oil. Finally, if major currencies including EURO and Australian dollar will appreciate against the U.S. dollar, this may also positively influence crude oil prices.
I speculate that during the last week of February, WTI oil price will trade in the range of $106-$114 and Brent oil price between $120 and $128.
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