Oil price (WTI and Brent) rallied last week: WTI rose by 1.07%; Brent oil increased by 2.3%. As a result, the gap of Brent oil over WTI widened again: The premium ranged between $13.58 and $16.21 – the highest range since March 2013. Last week, the EIA’s weekly report showed a sharp fall in oil’s stockpiles by 11.7 million barrels. The recent intermediate agreement that was struck between Iran and leading nations may cool down the region and thus pressure further down oil prices. Will oil change direction and fall next week? This week, several reports may affect oil prices. These items include: U.S core durable goods, U.S housing data (housing starts and pending home sales) and China’s manufacturing PMI, and EIA oil weekly update.
Here is a weekly outlook and analysis for the oil market for November 25th to November 28th:
Oil Prices – November Overview
During last week, crude oil price (WTI) change direction and rose by 1.07% and reached by Friday $94.84/b; further, Brent oil also increased by 2.3% to $111.05/b;
In the chart below are the daily shifts in WTI and Brent oil prices during the past several months (prices are normalized to January 31st). As seen below, Brent and WTI oil prices rallied.
The gap between Brent and WTI oil expanded again last week as it ranged between $13.58 and $16.21 per barrel. During the week, the premium increased by $1.5 per barrel.
The oil stockpiles sharply fell by 11.7 MB and reached 1,795.2 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.20: this correlation suggests that oil price, assuming all things equal, may further rise next week. But in order to better understand the fundamentals let’s examine the shifts in supply and demand:
Supply: Oil imports rose by 0.7% last week. Moreover, oil production slightly rose by 0.3%; the total supply rose by 0.5%;
Demand: Refinery inputs sharply increased again by 1% last week. In total the demand remained lower than the supply; the gap between supply and demand is still positive but the gap has slightly contracted – this may continue to pressure up oil prices as the U.S oil market tightens.
The chart below presents 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 downward trend of oil price in the past several weeks. But if U.S oil market continues to tighten, as it did during in the last couple of week, this could eventually lead to a rise in oil price.
The next weekly report will come out on Wednesday, November 27th and will refer to the week ending on November 22nd.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Wednesday – U.S Core Durable Goods: This monthly report regarding October may indirectly indicate the shifts in U.S. demand for commodities such as oil and gas. As of September 2013, new orders of manufactured durable goods rose to $234.3 billion;
Friday – China Manufacturing PMI: As of October, the Manufacturing PMI slightly rose for fifth consecutive month to 51.4 – i.e. China’s manufacturing sectors are growing at a slightly faster rate; in the last flash PMI report (by HSBC), the index fell to 50.4. If in the upcoming report the PMI start to fall, it could signal slowdown in the growth rate in China’s manufacturing sectors, which could also negatively affect oil;
Oil Forecast and Breakdown
From the supply side, the recent rise in imports and oil production is likely to curb down the pressure on oil prices. From the demand side, refinery inputs rose by a higher pace than the supply. In total, the gap between supply and demand has contracted due to slower growth rate in supply compared to demand; this could suggest the oil market has tightened again. In any case, the gap is still high and the demand remains lower than the supply. Looking forward, the upcoming American and Chinese reports could offer some additional insight regarding the progress of these economies. The difference between Brent and WTI picked up to the $13-$16 range. The potential agreement, which could ease the tension between the West and Iran, may reduce the pressure on Brent oil and thus may also slightly reduce the gap between Brent and WTI. U.S fundamentals suggest oil prices may rally. Moreover, if the USD continues to recover, this could pressure down oil price.
But oil is could also change direction, if the upcoming U.S and Chinese reports show growth and exceed expectations, if U.S stockpiles continue to fall, and if the oil market further tightens.
The bottom line, on a weekly scale, I guess oil price may change direction and fall. .
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