Crude oil prices are still high but didn’t do much during March as WTI oil price remained flat from the beginning of the month and Brent oil rose by 2%. Furthermore, during last week Brent oil edged up 0.45% and WTI slipped by 0.32%. The premium of Brent oil over WTI increased but remained in the $18 to $19 range. The tensions between Iran and the West took another step forward last week as SWIFT cut off Iran and thus made it much harder for Iranians to sell off their oil. By the end of the week it was also reported that U.S and U.K may release some of their emergency reserves to pressure down the high oil prices. If this plan will come into play it may bring down oil prices at least in the short run.
There are many news items and events that may affect the direction of crude oil prices during the upcoming week. So here is an outlook and analysis for the crude oil market for the week of March 19th to 23rd:
Crude Oil Prices – March Update
On Friday, March 16th crude oil price (WTI) sharply increased by 1.86% and reached $107.06/b; Brent oil price also rose by 2.62% to $126.40/b; during last week, WTI spot oil edged down by 0.32% and Brent oil rose by 0.45%.
In the chart below are the developments of WTI and Brent prices during March (prices are normalized to February 29th).
Premium of Brent over WTI – March Update
The difference between Brent oil and WTI spot oil slightly rose during last week, but was still in the range of $18-$19 per barrel. During March the premium increased by 14.98%. The tensions between Iran and Europe including the recent news regarding the further boycott and sanctions on Iran may keep the tensions high and thus also keep oil prices high as well.
During March the correlation between Brent oil price and WTI oil price (daily percent changes) increased to 0.835 – the highest leveling 2012. This means the relation between WTI and Brent oil prices is robust and strong. This figure coincides with the stabilization of the gap between Brent and WTI.
Standard Deviation
The standard deviations of oil prices sharply declined during March to their lowest level since January 2012. This might indicate that both crude oil prices’ volatility has sharply decreased during recent weeks.
IEA Monthly Oil Report for February
Last week the International Energy Agency published its monthly report on the global crude oil market as of February.
According to the report, during February, OPEC’s oil production rose to 31.42 million bbl/d compared; this was mainly due to an increase in Libya’s oil production. The non-OPEC countries’ oil production rose by only 0.3 mb/d during the first quarter of 2012. According to the report, the low growth was mainly due to the geopolitical tensions and unplanned outages in the North Sea and Canada.
In the report, the OECD industry oil inventories increased by 13.6 million bbl to 2,614 million bbl in January 2012. The oil stockpiles are still below the 5-year average for the seventh consecutive month; this means that the oil market is still tight during January in OECD countries, mainly in Europe; this was probably among the reasons for the rising gap between Brent oil and WTI in recent months (Here is a summary of the recent IEA report);
Crude Oil Stockpiles –Decreased Last Week
U.S. crude oil stockpiles decreased last week by 4.4 million barrels. For the week ending on March 9th oil stockpiles reached 1,749.5 million barrels. The current oil stockpiles are still below the quota from last year: the current crude oil stockpiles are 16.678 million barrels below oil stockpiles levels recorded during the parallel week in 2011.
The upcoming report will be published on Wednesday, March 21st and will refer to the week ending on March 16th.
Main Oil Related News Items
Monday– Monetary Policy Meeting Australia’s Bank: The minutes of the monetary policy meeting of the reserve bank of Australia shows the main factors that affected the board’s decision to leave the Bank’s basic interest rate remained unchanged at 4.25%; this rate decision may affect the Australian dollar currency and consequently crude oil;
Tuesday 20th of March 13:30 – U.S. Housing Starts: the U.S Census Bureau will publish the U.S housing starts report for February 2012; in the previous report, the adjusted annual rate rose by 1.5% to 699,000 in January;
Wednesday– U.S. Existing Home Sales: This report will refer to the changes in U.S. existing home sales during February 2012; in the recent report regarding January 2012 the number of homes sold increased: the seasonally adjusted annual rate reached 4.57 million home sales – a 4.3% gain (for the recent existing home sales review);
Wednesday– China flash Manufacturing PMI: this edged up to 49.7 in the recent report; this index indicates the changes in China’s manufacturing sectors growth rate; if this upward trend will continue, this may also positively affect commodities prices;
Wednesday–Japan’s Trade balance: The Japanese trade balance deficit for January 2012 increased by 7.8% to reach 612.8 billion YEN (roughly $7.38 billion) deficit (seasonally adjusted figures). Japan is among the leading importing countries of commodities, such as oil; its trade balance could provide insight into Japan’s changes in demand goods and services;
Thursday–Retails Sales Canada: This report examines the development in the retails sales in Canada during January 2012. It may affect the direction of USD/CAD exchange rate. In the previous report regarding December 2011, retails sales slightly decreased by 0.2% to $38.6 billion (see here the full report);
Thursday U.S. Jobless Claims Update: initial claims decreased to 351,000 claims for the week ending on March 10th; the number of insured unemployment fell by 81 thousand to 3,343 thousand during the week of March 3rd; the upcoming weekly update may affect the strength of the USD and consequently commodities;
Thursday– EIA U.S. Natural Gas Report: this weekly update of the U.S. natural gas market will present the recent changes natural gas production, storage, consumption and price developments for the week ending on March 16th (the previous review on the natural gas report);
Forex and Crude Oil Prices – March
The EURO/USD exchange rate edged up during last week by 0.40%; the developments regarding the Greek bailout and the recent FOMC meeting may have been among the factors to affect the path of the Euro/USD during the week. Furthermore, the AUD/USD also edged up by 0.15%. There are still positive and mid-strong linear correlations among these exchange rates (EURO/USD, AUD/USD, CAD/USD) and crude oil prices; e.g. during February/March, the correlation between WTI and AUD/USD is 0.29 and between WTI and Euro/USD is 0.36). If the U.S dollar will further depreciate against the EURO, Canadian dollar and Aussie dollar during the week, it may positively affect crude oil prices.
Crude Oil Prices Outlook and Analysis:
The premium of Brent over WTI edged up again during last week and as the tensions between Iran and the West are rising this premium may continue to rise. If the US and UK will start to release from their emergency reserves this action may reduce the high oil price. The IEA and OPEC may also intervene in the market if the oil prices will increase or if the tensions with Iran will take another step forward. If there won’t be big headlines during the week from these fronts then we probably should not see big movements in either direction for crude oil prices.
In the upcoming week there are several financial reports and events that may affect crude oil prices including the U.S housing starts, China manufacturing PMI, U.S existing and new home sales, and U.S jobless claims weekly update. If these reports will mostly be positive and show signs recovery in the U.S and China then these report may pressure up crude oil. Finally, if major currencies including EURO, and Aussie dollar will appreciate against the U.S. dollar, it may positively affect crude oil prices.
I speculate during the upcoming week, WTI oil price will trade between $104 and $112 and Brent between $122 and $128.
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