Oil prices (WTI and Brent) bounced back last week. WTI and Brent oil rose by 2.6% and 0.6%, respectively. As a result, the difference of Brent oil over WTI narrowed again: The premium ranged between $3.6 and $5.4. Last week, the EIA’s weekly report presented a gain in oil’s stockpiles of 5.2 million barrels. OPEC and IEA showed a drop in oil production worldwide. Will oil continue to rise? This week, several reports may affect oil prices. These items include: U.S PPI, China’s new loans, U.S industrial production, Philly Fed index, China’s GDP, and EIA oil weekly report.
Here is a weekly outlook for the oil market for April 14th – 18th:
Oil Prices – April Overview
During the previous week, crude oil price (WTI) increased by 2.6% and reached by Friday $103.74/b; moreover, Brent oil edged up by 0.6% to $107.33/b;
In the chart below are the daily changes in WTI and Brent oil prices during the past several months (prices are normalized to December 31st, 2013). As you can see, Brent and WTI oil prices changed direction and rose in the past several days.
The gap between Brent and WTI oil narrowed last week as it ranged between $3.59 and $5.38 per barrel. During the week, the premium dropped by $1.99 per barrel.
The oil stockpiles rose by 5.2 MB and reached 1,738.2 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.211: this correlation implies that oil price, assuming all things equal, may change direction and fall next week. But in order to better examine the fundamentals let’s consider the changes in supply and demand:
Supply: Oil imports remained unchanged last week. Furthermore, oil production inched up by 0.1%; the total supply increased by 0.1%;
Demand: Refinery inputs rose by 0.6% last week. In total, the demand remained below the supply, but the difference between supply and demand narrowed. This recent development may keep pushing up oil prices as the U.S oil market has become slightly tighter than it was a week back. After all, the linear correlation between the weekly price of oil lagged by on period and the changes in the gap between supply and demand is mid-strong and negative at -0.296.
The chart below shows the changes in the difference between supply and demand and the price of oil.
The next weekly report will be published on Wednesday, April 16th and will refer to the week ending on April 11th.
OPEC’s production Tumbled Down last month
The OPEC report was released last week and showed a sharp fall in OPEC’s oil production in March: OPEC’s production during March reached 29.610 million bbl/d – a 626 thousand bbl/d drop. This fall in production is mostly due to Iraq’s sharp fall in production from 3,481 thousand bbl/d to 3,193 thousand bbl/d – a 288 thousand bbl/d drop. Moreover, Libya’s output dropped to 243 thousand bbl/d – a fifth of its capacity. The production of Saudi Arabia also declined by 80.5 thousand bbl/d during March. If OPEC’s oil production further decreases, this could continue to pull up oil prices mainly Brent oil.
IEA’s Update as of February 2014
According to the latest report, OECD’s industry oil inventories inched down by 6.2 mb during February. Global oil supplies plunged by 1.2 mb /d (month-over-month) to 91.75 mb/d during March.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday –U.S. Retail Sales Report: This monthly update refers to March; in the last report regarding February, retail sales slightly rose by 0.3% (month-over-month); core retail also increased by 0.3%; this report also shows the changes in U.S’s gasoline retail sales, which could provide some input regarding the developments in demand for gasoline;
Tuesday –China First Quarter GDP 2014: In the fourth quarter of 2013, China grew by 7.7% in annual terms; China’s economy grew by 7.8% in the third quarter of 2013. The current expectations are that the first quarter of 2013 grew in annul terms by a similar pace to the previous quarter; if the growth rate further increases, this may positively affect oil prices;
Tuesday –China First Quarter GDP 2014: In the fourth quarter of 2013, China grew by 7.7% in annual terms; China’s economy grew by 7.8% in the third quarter of 2013. The current expectations are that the first quarter of 2013 grew in annul terms by a similar pace to the previous quarter; if the growth rate further increases, this may positively affect commodities prices;
Oil Forecast and Breakdown
From the supply side, the recent stable imports and modest gain in production weren’t enough to cool down the oil market. The supply only inched up. From the demand side, refinery inputs increased. Conversely, the storage moderately rose. In total, even though the total supply was still higher than demand, the difference between the two narrowed. This could suggest the oil market has tightened. Looking forward, the upcoming reports revolving the U.S and China could offer some additional information regarding the progress of these two top oil consumers worldwide. The gap between Brent and WTI ranged between $3 and $5 and is likely to pick up to the $5-$7 range.
The bottom line, on a weekly scale, oil might keep rising.
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