Crude oil prices didn’t do much during last week, but there was a shift in the premium of Brent oil over WTI as it reached the highest level since November 2011. Will this premium continue to rise in the upcoming week? Let’s examine the oil market the main news items and events that may influence the direction of crude oil prices in the following week.
Here’s a forecast and analysis of the crude oil market for the week of February 6th to February 10th:
Crude Oil Prices – February Update
On Friday, February 3rd crude oil price (WTI) rose by 1.54% and reached $97.84/b; Brent oil price also increased by 2.06% to $114.28/b; the recent growth in employment in the U.S may have helped oil prices to rally on Friday; during last week, WTI spot oil fell by 1.73% while Brent oil rose by 3.22%.
In the chart below are the changes of WTI and Brent prices during January and February (prices are normalized to December 30th). The chart shows the recent rally of Brent oil while WTI continued to trade down.
The difference between Brent oil and WTI spot oil sharply rose during last week and reached on Friday to $16.44 – the highest level since November 9th, 2011. During January the premium sharply rose by 42.06%. The recent tensions between Iran and the West including Iran’s threat to close Strait of Hormuz, with nearly 20% of the world’s oil is passing through it, might be responsible for the rise in the Brent premium; from the demand side, the warm weather in the U.S. and the extreme cold weather in Europe may have caused a higher growth for the demand of Brent compared with the demand for WTI.
During January the correlation between Brent oil price and WTI oil price (daily percent changes) was still strong and positive, but much lower than in December. This means that the relation between WTI and Brent oil prices is still strong and tight.
The standard deviation of the prices of crude oil has been declining in recent months as seen in the chart below; this finding suggests that the fluctuations in Brent and WTI prices continue to subside.
German Industrial Production: this report might indicate the progress of the German Economy and consequently may influence the direction of commodities prices;
Chinese CPI: the recent sharp decline in the inflation rate is probably an indication of the effect of the steps taken by the People Bank of China’s to curb the inflation pressures; this might also indicate an economic slowdown in China; China is among the leading countries in importing energy commodities;
ECB Rate Decision: last month Mario Draghi kept the rate unchanged at 1%; as of December, the Euro Area inflation rate declined to an annual rate of 2.8%. This means the low rate doesn’t seem to cause high inflation pressures (for now). If ECB will cut again interest rates it is likely to trade down the Euro;
China’s Trade Balance: China’s trade surplus reached a surplus of $16.5 billion last month; if China’s imports of oil will show an increase, it might also indict a growth in demand for crude oil and thus might pressure up crude oil prices;
American Trade Balance: This monthly report will present the changes in imports and exports of goods and services to and from the U.S, including crude oil; The American trade balance report for November 2011 the goods deficit rose by $4.6 billion and reached $63.2 billion; a further growth in goods deficit is likely to indicate a growth in demand for commodities;
Crude oil Stockpiles – Rose Last Week
U.S. Petroleum and crude oil stockpiles rose during last week by 8.4 million barrels and reached 1,751.7 million barrels. The current oil stockpiles are still below oil stockpiles levels recorded during the same week in 2011.
The upcoming report will come out on Wednesday, February 8th and will refer to the week ending on February 3rd.
Forex Exchange Rates Market and Oil Prices – February
The EURO/USD exchange rate slightly decreased during last week by 0.47%; the AUD/USD also slipped by 0.12%; I speculate the positive correlation between crude oil prices and Euro/ U.S dollar will keep influencing the development of oil prices. If the U.S dollar will further appreciate against the Euro and Australian dollar during the week, it might also pressure down crude oil prices.
U.S. Stock Market / Crude Oil Prices – January
The S&P500 index rose during the first week of February by 2.17% to reach 1,344 on Friday; during recent months there were strong positive correlations between crude oil prices and S&P500 index (e.g. during January the correlation with WTI oil price was 0.523 and with Brent oil 0.358). The chart presents the linear correlations between oil prices and S&P500 index 2011-2012.
I speculate, if the American stock market indexes will continue to rally, this will help crude oil price to increase.
Crude Oil Prices Forecast and Analysis:
Crude oil prices shifted gears as the premium of Brent over WTI has risen during last week. From the demand side, the weather is probably affecting the demand for heating oil in Europe ad U.S. as stated above. If the cold weather in Europe and the relatively warm weather for the season in the U.S. will progress, this might further widen the gap between Brent and WTI. From the supply side, the tensions between Iran and EU might keep oil prices high, mainly Brent oil price.
In the upcoming week there are several news items that might affect the direction of crude oil prices including the U.S. trade balance report, ECB rate decision and China’s trade balance report. Finally, if major currencies including EURO and Australian dollar will depreciate against the U.S. dollar, this may negatively affect crude oil prices.
I speculate that during the second week of February, WTI oil price will trade in the range of $95-$102 and Brent oil price between $109 and $116.
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