The oil market cooled down again during the previous week as the WTI and Brent dropped by 3.1% and 3.9%, respectively. As a result, the premium of Brent oil over WTI narrowed again; the premium ranged between $6.71 and $5.83. What is next for oil? This week, the following reports will be released: U.S retail sales, China’s GDP for the second quarter, Philly fed survey and the EIA’s oil weekly update.
Here is a weekly outlook for the oil market for July 14th – July 18th:
Oil Prices –July
During last week, crude oil price (WTI) tumbled down by 3.1% and reached by Friday $100.83/b; further, Brent oil also plunged by 3.9% to reach $106.66/b;
In the chart below are the daily changes in WTI and Brent oil prices during the past few weeks (prices are normalized to April 30th, 2014).
The gap between Brent and WTI oilwas in the range between $5.54 and $6.71 per barrel. During the week, the premium narrowed by $1.11 per barrel.
The oil stockpiles changed direction and rose by 4.5 MB and reached 1,814.081 million barrels. The linear correlation between the changes in stockpiles has declined again to -0.154: this correlation suggests that oil price was less related to the shifts in stockpiles. Let’s turn to the changes in supply/demand:
Supply: Oil imports increased by 0.5% during last week. Further, oil production inched up by 0.2%; the total supply rose by 0.3%;
Demand: Refinery inputs also increased by 1.1% last week. In total, the demand was above the supply. This recent development may bring back up the price of oil. The linear correlation between the weekly price of oil lagged by on period and the changes in the gap between supply and demand is mid-strong and negative at -0.271.
The chart below shows the developments in the difference between supply and demand and the price of oil.
IEA Monthly Report
According to the last monthly update, in June, the global oil supply remained nearly unchanged to reach 92.6 million bbl/d in June, mainly due to little shift in the production of OPEC countries. The global demand outlook is expected to rise to 92.7 million bbl/d during 2014 – slightly lower than the previous estimate. If the demand forecast keeps coming down, this could drag down oil prices.
OPEC’s production slightly fell
According to the recent OPEC Report, OPEC’s oil production modestly declined by 79.3 thousand bbl/d to reach 29,701 thousand bbl/d in June. Most of the drop comes from slightly lower production in Iraqi. As long as the total OPEC supply remains stable, the price of oil is likely to slowly come down.
Oil Related News for the Week
Here are several news items that could affect the direction of oil prices:
Tuesday –China Second Quarter GDP 2014: In the first quarter of 2014, China grew by 7.4% in annual terms – lower than in the previous quarter;
Tuesday –U.S. Retail Sales Report: In the last report regarding May, retail sales rose by 0.3% (month-over-month); core retail edged up by 0.1%; this report also shows the changes in U.S’s gasoline retail sales, which could provide some insight regarding the developments in demand for gasoline;
Thursday – Philly Fed Manufacturing Index: This monthly survey projects the growth of the US manufacturing sectors. In the last survey regarding June, the growth rate slightly rose from +15.4 in May to +17.8 in June. If the index further rallies, it may positively affect not only U.S Dollar but also U.S equity markets and commodities (the recent Philly Fed review);
Oil Outlook and Breakdown
The recent reports by the IEA and OPEC showed little change in OPEC’s output and the fighting in Iraq didn’t have an adverse impact on oil production in this country. These findings suggest the rally of oil prices may have been unfounded and thus oil prices are likely to further come down in the near term. The premium of Brent over WTI contracted to range between $5 and $6 and is likely to come further down to around $4 and $5. Unless the economic reports from China and U.S exceed expectations, oil prices are likely to keep coming down.
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