Oil Outlook for July 21-25

This time it wasn’t the Middle East  to pull up oil prices – but close by: The recent news regarding the firing down of the Malaysian plane above Ukraine triggered President Obama to step in and impose additional restrictions on Russia. This news was enough to drag down U.S equities and pull back up oil and gold prices. This comes after the oil market slowly cooled down in the past couple of weeks. But are the fundamentals continue to support a decline in oil prices? By the end of last week, WTI and Brent rose by 2.3% and 0.5%, respectively. As a result, the premium of Brent oil over WTI narrowed again; the premium ranged between $2.77 and $6.07. This week, the following reports will be released: U.S core durable goods, Germany, France and China’s manufacturing PMI, and the EIA’s oil weekly update.

Here is a weekly outlook for the oil market for July 21st – July 25th:   

Oil Prices –July

During last week, crude oil price (WTI) rose by 2.3% and reached by Friday $103.13/b; further, Brent oil also increased by 0.5% to reach $107.24/b;

In the chart below are the daily changes in WTI and Brent oil prices during July (prices are normalized to May 30th, 2014).

oil forecast Brent and WTI July 13  2014Premium of Brent over WTI – July

The spread between Brent and WTI oilwas in the range between $2.77 and $6.07 per barrel. During the week, the premium contracted by $1.72 per barrel.

Difference between Brent and WTI July 13 2014Oil Stockpiles, Demand and Supply

The oil stockpiles rose again by 1.2 MB and reached 1,815.3 million barrels. The linear correlation between the changes in stockpiles has declined again to -0.157: this correlation implies that oil price was less related to the changes in stockpiles. Let’s turn to the recent developments in supply/demand:

Supply: Oil imports rose by 0.7% during last week. Further, oil production edged up by 0.3%; the total supply rose by 0.5%;

Demand: Refinery inputs also rose by 1.9% last week. In total, the demand grew faster and higher than the supply. This recent development may keep pulling up oil prices. The linear correlation between the weekly price of oil lagged by on period and the shifts in the gap between supply and demand is mid-strong and negative at -0.254.

The chart below shows the changes in the difference between supply and demand and the price of oil.

oil market tight loose oil price  July 11The next weekly report will be published on Wednesday, July 23rd and will refer to the week ending on July 18th.  

Oil Related News for the Week

Here are several news items that could affect the direction of oil prices:

Wednesday – China Manufacturing PMI (flash): HSBC will release its flash manufacturing PMI survey for July. Last month’s report regarding May 2014, the Manufacturing PMI rose again to 50.8 – i.e. China’s manufacturing sectors is scaling up. If in the upcoming report the PMI index rises again, it means China’s manufacturing sector is improving;

Thursday – Flash German, French and Euro Zone Manufacturing PMI: In the previous monthly update regarding June 2014, France’s PMI dropped to 47.8 i.e. the manufacturing conditions are contracting. Germany’s PMI slightly declined to 52.4 – the industry still grows but a slower pace. These estimates show the developments in the Euro Area’s manufacturing conditions; this news, in turn, may affect the Euro/USD currency pair and consequently commodities prices;

Friday – U.S Core Durable Goods: This monthly report regarding June will indicate the developments in U.S demand for commodities including oil and gas. As of May 2014, new orders of manufactured durable goods slipped to $238.3 billion – a 0.9% drop compared to April; if this report shows additional contraction in new orders, then it could drag down not only the USD but also commodities;

Oil Outlook and Breakdown

The ongoing rise in U.S refinery input at a faster pace than the U.S oil supply provided backwind for the rise in oil price and the contraction in the gap between Brent and WTI. The rise in tension between Russia and U.S may have a short term impact on oil prices. In the short term, oil prices could slowly resume their rally as the demand for oil in the U.S picks up. 

For further reading: