The oil market heated up in the past week following the fighting in Iraq, which has raised the uncertainty in the Middle East. As a result, both prices of oil including WTI and Brent rose by4.1% and 4.4%, respectively. The gap of Brent oil over WTI slightly widened by the end of the week; the premium ranged between $5.58 and $6.50. Will the oil market keep heating up? This week, several reports and events may affect the oil market including OPEC’s Summit, U.S JOLTS, U.S retail sales, EIA and OPEC monthly updates, China’s trade balance, and EIA oil weekly report.
Here is a weekly outlook for the oil market for June 9th – June 13th:
Oil Prices –June
During last week, crude oil price (WTI) sharply rose by 4.1% and reached by Friday $106.91/b; moreover, Brent oil increased by 4.4% to reach $113.41/b;
In the chart below are the daily shifts in WTI and Brent oil prices during the past several weeks (prices are normalized to April 30th, 2014).
The gap between Brent and WTI oilwas in the range between $5.95 and $6.36per barrel. During the week, the premium slipped by $0.75 per barrel.
The oil stockpiles increased again by 6.2 MB and reached 1,798.73 million barrels. The linear correlation between the changes in stockpiles has remained around -0.212: this correlation suggests that oil price, assuming all things equal, may fall next week. But in order to better examine the fundamentals let’s examine the changes in supply and demand:
Supply: Oil imports inched up by 0.1% during last week. Moreover, oil production edged up by 0.1%; the total supply rose by 0.1%;
Demand: Refinery inputs inched down by 0.2% last week. In total, the demand was still higher than the supply but the gap between the two narrowed again. This recent development may keep pull up oil prices as the U.S oil market loosened. After all, 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 -0.248.
The chart below presents the developments in the difference between supply and demand and the price of oil.
OPEC Summit – no change in oil production quota
The OPEC summit was concluded last week, and the members decided to keep its oil production quota on 30 million bbl per day. OPEC also expects the total oil demand is likely to rise by 1.1 mb/d during 2014; this growth in demand will be completed with the 1.4 mb/d in non-OPEC countries’ production.
OPEC’s production slightly grew in May
According to the latest OPEC Report, OPEC’s oil production modestly rose by 142.3 thousand bbl/d to reach 29,765 thousand bbl/d in May. Most of the rise comes from higher production in Iraq and Angola. Perhaps in the coming months, Iraq’s oil production could come down due to the fighting in parts of the country. Libya’s oil production remains low at 203 thousand bbl/d.
IEA Monthly Report
Based on the latest monthly update, in May, the global oil supply grew by 530 thousand bbl/d to reach 92.8 million bbl/d mainly due to rise in non-OPEC countries’ production. The global demand outlook is expected to rise to 92.8 million bbl/d during 2014. If the demand forecast keeps rising, this could push up oil prices.
Oil Related News for the Week
Here are several news items that could affect the direction of oil prices:
Monday –U.S Industrial Production: This report will present the monthly changes in the U.S industrial production during May; as of April, the production fell by 0.6%;
Thursday – Philly Fed Manufacturing Index: This monthly survey estimates the growth of the US manufacturing sectors. In the previous survey regarding May, the growth rate slipped from +16.6 in April to +15.4 in May. If the index further falls, it may negatively affect not only U.S Dollar but also U.S equity markets and commodities (the recent Philly Fed review);
Oil Outlook and Breakdown
From the supply side, the modest rise in imports and production are likely to keep loosening up the oil market. Moreover, from the demand side, refinery inputs inched down. In total, while the demand remained higher than the supply, the gap between the two narrowed again. Despite the developments in the U.S, the tensions in the Middle East especially in Iraq could bring oil prices further up. The difference between Brent and WTI remained in range between $5 and $6 and is likely to slightly widen to the $5 and $7 range.
The bottom line, on a weekly scale, oil is likely to keep rising, unless tensions in Iraq will subside.
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