The price of oil (WTI) changed direction and declined during last week: WTI fell by 1.75%; Brent oil, however, rose again by 1.66%. As a result, the gap of Brent oil over WTI expanded: The premium ranged between $6.65 and $9.26. Based on the latest EIA weekly report, oil stockpiles rose again by 1.7Mb. In the U.S, imports and production increased again last week. Refinery inputs sharply fell. Will oil continue to fall next week? This week, several reports may move the oil market. These items include: China’s GDP, Philly Fed index, developments in U.S debt ceiling and budget talks, and EIA oil weekly report.
Here is a weekly outlook and analysis for the oil market for October 14th to October 18th:
Oil Prices – October
During the pervious week, crude oil price (WTI) fell by 1.48% and reached by Friday $103.84/b; further, Brent oil also rose by 1.01% to $109.46/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, oil prices haven’t done much in recent weeks.
The spread between Brent and WTI oil expanded last week as it ranged between $6.65and $9.26 per barrel. Moreover, during the week, the premium rose by $3.64 per barrel.
The oil stockpiles slightly increased again by 1.7 MB and reached 1,823.4 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.202: this correlation suggests that oil price, assuming all things equal, may decline again next week. But in order to better understand the changes in fundamentals let’s also look at the changes in supply and demand:
Supply: Oil imports slightly increased by 0.1% last week. The weekly changes in oil imports have a mid-strong negative correlation (-0.211) that implies oil price may fall next week. Moreover, oil production also rose by 0.2%;
Demand: Refinery inputs sharply declined by 1.6% last week. In total the demand was lower than the supply; furthermore, the difference has widened – this may pressure further down oil prices as the oil market in the U.S continues loosen.
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 update will come out on Wednesday, October 17thand will refer to the week ending on October 12th. The report might not come out if the U.S government shutdown continues.
OPEC’s Oil production continues to fall
The OPEC report came out last week and showed a drop in OPEC’s oil production in the past month: OPEC’s production during September reached 30.047 million bbl/d – a 389 thousand bbl/d drop. This decline in production is mostly due to Iraq and Saudi Arabia. Libya’s oil production remains low at 501 thousand bbl/d – nearly a third of its normal capacity. If OPEC’s oil production further falls, this could continue to pressure up oil prices mainly Brent oil.
IEA Monthly Update for October
According to the recent report, OECD’s industry oil inventories for August fell by 7.8 mb to 2,660 mb. The high US refinery crude in September raised the global throughput estimate for the third quarter of 2013. Global oil supplies fell by 625 thousand bbl/d to 91.12 million bbl/d during September due to lower OPEC output. The demand strength has raised the 2013 oil demand outlook by 90 thousand bbl/d, to 91.0 million bbl/d. Demand growth is expected to reach 1.0 million bbl/d during the year.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Thursday – Philly Fed Manufacturing Index: This monthly survey estimates the growth of the US manufacturing sectors. In the recent survey regarding September, the growth rate fell from +9.3 in August to +22.3 in September. If the index continues to sharply rise, it may positively affect not only U.S Dollar but also U.S equity markets and commodities (the recent Philly Fed review);
Thursday –China Third Quarter GDP 2013: In the second quarter of 2013, China grew by only 7.5% in annual terms; China’s economy grew by 7.7% in the first quarter of 2013. The current expectations are that the second quarter of 2013 grew in annul terms by a slower rate than in the previous quarter; if the growth rate further dwindles, this may adversely affect oil prices;
Oil Outlook and Breakdown
From the supply standpoint, the increase in oil imports and production led to expansion in supply. From the demand side, refinery inputs fell again. In total, the gap between supply and demand has shifted so that the supply is surpassing the demand, which could suggest the oil market is looser. The looser oil market in the U.S while the European oil market remains unchanged could result in a further widening of the gap between Brent and WTI. Looking forward, the upcoming reports related to U.S and China could offer some additional insight regarding the potential changes in demand for oil. These reports include China’s GDP for the third quarter, and Philly Fed index. If these reports exceed expectations, they may pull up oil prices. The developments in U.S around the government shutdown and raising the debt ceiling could raise the uncertainty in the financial markets and affect oil prices. Finally, the fundamentals suggest oil prices should further decline in the mid-term as long as tensions in the Middle East are under control, the U.S market continues to loosen and the global supply isn’t plummeting.
The bottom line, on a weekly scale, I guess oil price (WTI) will further fall.
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