Oil price (WTI and Brent) rallied again during last week. WTI oil and Brent oil rose by 2.41% and 0.77%, respectively. As a result, the gap of Brent oil over WTI narrowed: The premium ranged between $12.69 and $10.26. Last week, the EIA’s weekly update showed a decline in oil’s stockpiles of 4 million barrels. Will oil continue to rise? This week, several reports may affect oil prices. These items include: U.S GDP, China’s manufacturing PMI, U.S core durable goods, and EIA oil weekly report.
Here is a weekly forecast for the oil market for January 27th to 31st:
Oil Prices – January Overview
During last week, crude oil price (WTI) rose by 2.41% and reached by Friday $96.64/b; moreover, Brent oil increased by 0.77% to $107.88/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 rallied during recent week.
Premium of Brent over WTI – January
The gap between Brent and WTI oil rose last week as it ranged between $12.69 and $10.26 per barrel. During the week, the premium decreased by $1.45 per barrel.
Oil Stockpiles, Demand and Supply
The oil stockpiles fell again by 4 MB and reached 1,738.7 million barrels. The linear correlation between the developments in stockpiles has remained stable at -0.194: this correlation suggests that oil price, assuming all things equal, may continue to rally next week. But in order to better understand the fundamentals let’s analyze the developments in supply and demand:
Supply: Oil imports remained unchanged last week. Conversely, oil production inched down by 0.2%; the total supply decreased by 0.1%;
Demand: Refinery inputs fell by 1.6% last week. In total, the demand was still higher than the supply. Moreover, due to sharp drop in demand and little fall in supply, the gap between supply and demand narrowed. This narrower gap may drag down oil prices as the U.S oil market loosened.
The chart below shows the changes in the difference between supply and demand and the price of oil.
If U.S oil market further loosens, this could pull down oil price.
The next weekly report will be released on Wednesday, January 30th and will pertain to the week ending on January 24th.
IEA’s Update as of January 2014
According to the recent report, OECD’s industry oil inventories tumbled down by 53.6 mb during November. The outlook for global oil refinery was raised by 110 tb /d to reach 76.8 mb/d. Global oil supplies edged down by 25 tb /d month-over-month to 92.23 mb/d during December. The global demand for 4Q13 was raised by 135 tb /d due to unexpectedly strong US deliveries, partly offset by curtailments in China and other countries.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Tuesday – U.S Core Durable Goods: As of November 2013, new orders of manufactured durable goods rose to $497.9 billion; if this report shows another rise in new orders, then it could pull up oil prices;
Thursday – First U.S GDP 4Q 2013 Estimate: This will be the first estimate of U.S’s fourth quarter 2013 real GDP growth. In the previous estimate the U.S GDP rose by 4.1% in the third quarter of 2013 (it was revised up);
Friday – China Manufacturing PMI: As of December, the Manufacturing PMI slipped to 51 – i.e. China’s manufacturing sectors are expanding 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;
Oil Outlook and Breakdown
From the supply, the modest decline production and stable oil imports resulted in a slight decline in oil supply, which could have little effect on the price of oil. From the demand, refinery inputs sharply fell. Nonetheless, the storage declined again for twelve out of the past thirteen weeks. Further, the difference between supply and demand has expanded, as the demand remains higher than the supply; this could suggest the oil market has tightened. Looking forward, the forthcoming reports regarding U.S and China could offer some additional insight regarding the progress in the demand for oil in these countries. The gap between Brent and WTI ranged between $10 and $12. The slightly looser oil market in the U.S is likely to widen the gap between WTI and Brent oil. Conversely, if the US dollar continues to weaken, this could pull up oil prices.
The bottom line, on a weekly scale, I guess oil price may change course and fall and the gap between WTI and Brent to slightly narrow.
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