Oil price (WTI) slipped again last week, while Brent oil rallied: WTI inched down by 0.80%; Brent oil sharply rose by 3.26%. As a result, the gap of Brent oil over WTI expanded: The premium ranged between $11.26 and $14.78 – the highest range since April 2013. Last week, the EIA’s weekly report showed a drop in oil’s stockpiles by 5.9 million barrels and the oil market tightened. The OPEC report showed no change in the OPEC production, but the frictions in Libya and the tension between Israel and Iran may have contributed to the rally of Brent oil. Will oil rally next week? This week, several reports may affect oil prices. These items include: U.S retail sales, EU and China’s manufacturing PMI, Philly fed index, and EIA oil weekly report.
Here is a weekly outlook and analysis for the oil market for November 18th to November 22nd:
Oil Prices – November Overview
During last week, crude oil price (WTI) slipped by 0.80% and reached by Friday $93.84/b; conversely, Brent oil sharply rose by 3.26% to $108.55/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 oil price rallied in the past couple of weeks.
The gap between Brent and WTI oil widened last week as it ranged between $11.26 and $14.78 per barrel. During the week, the premium increased by $4.19 per barrel.
The oil stockpiles slipped by 5.9 MB and reached 1,806.9 million barrels. The linear correlation between the changes in stockpiles has remained stable at -0.198: this correlation implies that oil price, assuming all things equal, may rally next week. But in order to better understand the fundamentals let’s analyze the developments in supply and demand:
Supply: Oil imports slipped again by 0.5% last week. Conversely, oil production sharply rose by 1.8%; the total supply rose by 0.6%;
Demand: Refinery inputs rose again by 0.9% last week. In total the demand remained lower than the supply; the gap between supply and demand is still positive but the difference has slightly narrowed – this may eventually slightly pull up oil prices as the oil market in the U.S tightens.
The chart below shows the changes in the gap between supply and demand (below zero: Demand is above Supply; above zero: Supply is above Demand).
As seen above, the currently loose oil market in the U.S coincides with the drop of oil price. But if U.S oil market continues to tighten, as it did during the previous week, this could eventually lead to a rise in oil price.
The next weekly report will be released on Wednesday, November 20th and will refer to the week ending on November 15th.
OPEC Monthly Report
According to the recent OPEC Report, OPEC’s oil production remained nearly flat at 29,894 thousand in October – nearly unchanged from the preceding month. This news suggests the oil supply hasn’t changed despite the tensions in Libya.
IEA Monthly Report
According to the recent monthly update, the global oil supply rose in October by 640 thousand bbl/d to reach 91.8 million bbl/d mainly due to rise in non-OPEC countries’ liquids. The estimate on global demand was slightly raised in 2013 due to stronger than expected oil demand in Europe during Q3. For 2014 the projection are for a 1.1 mb/d gain.
The rise in expected demand for oil in 2014 may have pulled up the price of oil. Global refinery runs for Q4 have been cut by 0.6 mb/d due to reduced European throughputs. These data provide a mixed signal regarding the progress of the oil market.
Middle East and Oil – update
The riots in Libya between rival militias in the outskirts of Tripoli have raised the uncertainty in the region and could eventually further reduce Libya’s oil production, which is currently one third of its normal output. But since Libya’s output currently accounts for only 1.3% of OPEC’s total output, it is likely to have little adverse effect on the oil market. The tensions between Israel and Iran over Iran’s nuclear program continue. The U.S continues to ease the situation but with little success. These tensions could also have some small effect on oil prices. But only if there were to be an escalation in the situation, this could have a significant effect on oil prices.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Wednesday –U.S. Retail Sales Report: This monthly report refers to October; in the previous report regarding September, retail sales inched down by 0.1% (month-over-month); core retail sales rose by 0.4%; this report could signal the developments in U.S’s gasoline demand and thus may affect U.S oil;
Thursday – Flash Chinese German, French and Euro Zone Manufacturing PMI: In the last monthly report regarding October 2013, the Germany’s PMI inched up to 51.5 i.e. the manufacturing conditions are growing but at a slightly faster pace. France’s PMI inched down to 49.4. This report serves signals to the developments in the Euro Area’s manufacturing conditions; this news, in turn, may affect the Euro/USD currency pair and consequently commodities prices;
Thursday – Philly Fed Manufacturing Index: This monthly survey estimates the growth of the US manufacturing sectors. In the last survey regarding October, the growth rate fell from +22.3 in September to +19.8 in October. If the index continues to fall, it may adversely 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 ongoing drop in imports continued to partly offset the rise in oil production. From the demand side, refinery inputs rose again. In total, the gap between supply and demand has diminished due to the drop in imports; this could suggest the oil market has tightened. In any case, the gap is still high and the demand remains lower than the supply. Looking forward, the upcoming European, American and Chinese reports could offer some additional insight regarding the growth of these economies. The gap between Brent and WTI picked up to the $11-$14 range. This recent rise might be due to stronger than expected demand for oil in Europe, which suggests the oil market in Europe is tighter than estimated. The fundamentals suggest oil prices may rise in the coming weeks especially if the upcoming reports show growth and exceed expectations and if the oil market further tighten. Moreover, if the USD continues to fall, this could also pull up the price of oil.
The bottom line, on a weekly scale, I guess oil price (WTI) may slightly rise.
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