Oil Outlook for April 21-25

Oil prices (WTI and Brent) rose again last week. WTI and Brent oil increased by 0.5% and 2%, respectively. As a result, the difference of Brent oil over WTI widened: The premium ranged between $5 and $5.23. Last week, the EIA’s weekly update showed a sharp gain in oil’s stockpiles of 13.8 million barrels. Will oil change direction and fall? This week, several reports may affect oil prices. These items include: U.S core durable goods, China’s manufacturing PMI, and EIA oil weekly report.

Here is a weekly outlook for the oil market for April 21st – 25th:

Oil Prices – April Overview

During last week, crude oil price (WTI) rose by 0.5% and reached by Friday $104.30/b; moreover, Brent oil increased by 2% to $109.53/b;

In the chart below are the daily shifts 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 rose in the past several weeks.

oil forecast Brent and WTI April 20  2014
Premium of Brent over WTI – April

The difference between Brent and WTI oilslightly expanded last week as it ranged between $4.99 and $5.23 per barrel. During the week, the premium rose by $1.64 per barrel.

Difference between Brent and WTI April 20  2014Oil Stockpiles, Demand and Supply

The oil stockpiles sharply increased by 13.8 MB and reached 1,752.0 million barrels. The linear correlation between the changes in stockpiles has remained stable at -0.204: this correlation suggests that oil price, assuming all things equal, may decline next week. But in order to better examine the fundamentals let’s consider the changes in supply and demand:

Supply: Oil imports rose by 3.3% during last week. Furthermore, oil production inched up by 0.3%; the total supply increased by 1.7%;

Demand: Refinery inputs rose by 1.1% last week. In total, the demand remained below the supply, and the difference between supply and demand expanded. This recent development may drag down oil prices as the U.S oil market has become slightly looser 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 -0.297.

The chart below presents the changes in the difference between supply and demand and the price of oil.

oil market tight loose oil price  April 20If U.S oil market continues to tighten, this could pressure up oil price.    

The next weekly report will be released on Wednesday, April 23rd and will refer to the week ending on April 18th.

Oil Related News for the Week

Here are several news items that could affect the direction of oil prices:

Wednesday – China Manufacturing PMI (flash): HSBC will release its flash manufacturing PMI survey for April. Last month’s report referring to March 2014 the Manufacturing PMI slipped to 48.1 – i.e. China’s manufacturing sectors is contracting at a faster rate. If in the upcoming update the PMI index continues to decline, it could signal China’s economy isn’t growing. This may also adversely affect oil prices;

Thursday – U.S Core Durable Goods: This monthly report regarding March may indirectly indicate the shifts in U.S demand for commodities including oil and gas. As of February 2014, new orders of manufactured durable goods increased to $229.4 billion; if this report shows another rise in new orders, then it could pull up oil prices;

Oil Outlook and Breakdown

From the supply side, the sharp rise in imports and modest gain in production didn’t cool down the oil market. From the demand side, refinery inputs also rallied. In total, the supply remained above the demand and the gap between the two widened. Moreover, the storage sharply rose. This could suggest the oil market has loosened. Looking forward, the upcoming reports revolving the U.S and China could offer some input regarding the progress of these two top oil consumers worldwide. The difference between Brent and WTI ranged between $4 and $5 and is likely to pick up to the $5-$7 range.

The bottom line, on a weekly scale, oil might change direction and drop.   

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