Oil prices (WTI and Brent) continued to fall during last week: WTI decreased by 3.31%; Brent oil, by 0.95%. As a result, the gap of Brent oil over WTI further widened: The premium ranged between $10.81 and $13.09. Last week, the EIA’s weekly update presented a drop in oil’s stockpiles by 5.8 million barrels and the oil market slightly tightened. Will oil continue to decline next week? This week, several reports may affect oil prices. These items include: U.S non-farm payroll report, China’s industrial production, U.S GDP for the third quarter, German factory orders and EIA oil weekly reports.
Here is a weekly forecast and analysis for the oil market for November 4th to November 8th:
Oil Prices – November Review
During last week, crude oil price (WTI) declined by 2.94% and reached by Friday $97.85/b; further, Brent oil also tumbled down by 2.74% to $106.93/b;
In the chart below are the daily changes in WTI and Brent oil rates during the past several months (prices are normalized to January 31st). As seen below, oil prices declined in recent weeks.
The gap between Brent and WTI oil expanded last week as it ranged between $9.08 and $12.17 per barrel. During the week, the premium slipped by $0.05 per barrel.
The oil stockpiles fell by 5.8 MB and reached 1,821.2 million barrels. The linear correlation between the changes in stockpiles has remained stable at -0.20: this correlation suggests that oil price, assuming all things equal, may rally next week. But in order to better understand the shifts in fundamentals let’s also look at the changes in supply and demand:
Supply: Oil imports sharply decreased by 2.8% last week. The weekly changes in oil imports have a mid-strong negative correlation (-0.194) that suggests oil price may rise next week. Conversely, oil production slightly rose by 0.2%;
Demand: Refinery inputs fell by 0.7% last week. In total the demand remained lower than the supply; conversely, the difference has narrowed – this may pull up oil prices as the oil market in the U.S slightly tightened.
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).
The next weekly report will come out on Wednesday, November 6th and will refer to the week ending on November 2nd.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday – U.S Factory Orders: In the previous report factory orders decreased by 2.4%; this report will offer some insight regarding the changes of the U.S economy;
Wednesday – Australian Trade Balance: The forthcoming report will refer to September. In the last update, for August, the seasonally adjusted balance of goods and services reached an $820 million deficit (see here latest update);
Thursday – First U.S GDP 3Q 2013 Estimate: This will be the first estimate of U.S’s third quarter 2013 real GDP growth. In the latest estimate the U.S GDP rose by 2.5% in the second quarter of 2013 (it was revised up). If the growth rate from second quarter of 2013 to the third quarter further rises, this could positively affect commodities;
Friday – U.S. Non-Farm Payroll Report: In the previous employment report for September 2013, the labor market slightly expanded: The number of non-farm payroll employment rose by 148k – lower than the number many had anticipated; the U.S unemployment rate edged down to 7.2%; the upcoming employment report could show a drop in jobs or even a contraction, due to the government shutdown;
Friday – China’s Industrial Production: Based on the last month’s report, China industrial production fell to an annual rate of 10.2%; if the growth rate further falls, it may suggest China’s economy isn’t progressing any faster;
Oil Forecast and Breakdown
From the supply side, the sharp fall in imports led to the contraction in supply despite the moderate increase in production. From the demand side, refinery inputs also declined. In total, the gap between supply and demand has contracted, which could suggest the oil market has tightened. Nonetheless, the gap is still high compared to its level in recent months. Looking forward, the upcoming U.S, EU and China’s reports could offer some additional information regarding the growth of these economies. The difference between Brent and WTI may remain around the $9-$12 until new changes will come to fruition in China from the demand side or Middle East and Libya from the supply side. The fundamentals suggest oil prices may reach a halt or even slightly rally especially if the upcoming reports show growth and exceed expectations and if the oil market continues to tighten. Conversely, if the USD continues to rally, this could pressure down oil prices.
The bottom line, on a weekly scale, I guess oil price (WTI) may remain flat or perhaps even slightly rise.
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