Oil price (WTI and Brent) changed direction and fell last week: WTI declined by 1.08%; Brent oil, by 2.49%. As a result, the gap of Brent oil over WTI contracted: The premium ranged between $10.87 and $13.96. Last week, the EIA’s weekly report presented a decline in oil’s stockpiles by 4.7 million barrels. The IEA report showed a looser oil market during November; OPEC’s report showed another drop in oil production. Will oil resume their upward trend next week? This week, several reports and meetings may affect oil prices. These items include: FOMC meeting, U.S GDP, China and German manufacturing PMI, and EIA oil weekly update.
Here is a weekly outlook and analysis for the oil market for December 16th to December 20th:
Oil Prices – December Overview
During last week, crude oil price (WTI) change direction again and fell by 1.08% and reached by Friday $96.6/b; further, Brent oil decreased by 2.49% to $108.83/b;
In the chart below are the daily shifts in WTI and Brent oil prices during the past several months (prices are normalized to January 31st). As seen below, Brent and WTI oil prices changed direction and declined last week.
The gap between Brent and WTI oil also fell last week as it ranged between $10.87 and $13.96 per barrel. During the week, the premium fell by $1.73 per barrel.
The oil stockpiles fell again by 4.7 MB and reached 1,781.7 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.208: this correlation suggests that oil price, assuming all things equal, may further increase next week. But in order to better understand the fundamentals let’s examine the developments in supply and demand:
Supply: Oil imports decreased by 3.2% last week. Moreover, oil production slightly rose by 0.3%; the total supply decreased by 1.4%;
Demand: Refinery inputs rose again by 1.2% last week. In total, the demand was higher than the supply. Thus due to the sharp rise in demand and the drop in supply, the gap between supply and demand became negative. This gap may pull up oil prices as the U.S oil market continues to tighten.
The chart below shows the changes in the gap between supply and demand (below zero: Demand is above Supply; above zero: Supply is above Demand).
As seen above, the currently tight oil market in the U.S coincides with the rally of oil price in the previous weeks. If U.S oil market continues to tighten, as it did in the past several weeks, this could eventually pressure up oil price.
The next weekly report will be released on Wednesday, December 18th and will refer to the week ending on December 13th.
OPEC’s Oil production declined again
The OPEC report was released last week and presented a decline in OPEC’s oil production in the past month: OPEC’s production during November reached 29.633 million bbl/d – a 385 thousand bbl/d drop. This decline in production is mostly due to Libya, Nigeria and Saudi Arabia. Conversely, Iraq’s production partly offset the drop in these countries production. Libya’s oil production fell to its lowest level this year at 371 thousand bbl/d – nearly a quarter of its normal capacity. If OPEC’s oil production continues to decline, this could pressure up oil prices mainly Brent oil.
IEA Monthly December Update
According to the recent report, OECD’s industry oil inventories for October slipped by 12.1 mb to 2,684 mb. Global refinery input in October plunged. Global oil supplies rose by 310 thousand bbl/d to 92.3 million bbl/d during November due to higher non-OPEC output. The demand strength has raised the 2013 oil demand outlook by 130 thousand bbl/d, to 91.2 million bbl/d. Demand growth is expected to reach 1.2 million bbl/d during next year.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday – China Manufacturing PMI (flash): HSBC will release its flash manufacturing PMI survey for December. Last month’s report regarding November 2013 the Manufacturing PMI declined to 50.4 – i.e. China’s manufacturing sectors is growing but at a slightly slower rate. If in the upcoming update the PMI index continues to fall, it could signal the progress in China’s economy is slowing down. This may also affect commodities prices;
Monday – Flash German, French and Euro Zone Manufacturing PMI: In the previous monthly report regarding November 2013, the Germany’s PMI rose to 52.5 i.e. the manufacturing conditions are growing at a slightly faster pace. France’s PMI fell to 47.8. This report serves signals to the developments in the Euro Area’s manufacturing conditions; this news, in turn, may affect the Euro/USD currency pair and consequently commodities prices;
Wednesday – FOMC Meeting and Press Conference: The FOMC will decide whether it will start tapering QE3. Many analysts expect the FOMC will announce the tapering of its long term treasury bonds purchase program by $15 billion a month. In such an event, the total asset purchase program, in this case, would remain at $70 billion a month. Considering the little effect the treasury bonds purchase program has had on the economy and the slow progress of the labor market, the FOMC might decide to take different measures to stimulate the economy, such as raising the inflation target, increasing the mortgage backed securities purchase program, or pegging the long term interest rates (10 years) at 2.5%. If the Fed reduces QE3, it is might pull up USD and drag down (for a short period) oil prices. If the Fed won’t introduce any changes to its monetary policy, oil prices might bounce back;
Friday – Final U.S GDP 3Q 2013 Estimate: This will be the last estimate of U.S’s third quarter 2013 real GDP growth. In the previous estimate the U.S GDP rose by 3.6% in the third quarter of 2013;
Oil Outlook and Breakdown
From the supply side, the rise in imports is likely to ease any potential rise in oil prices. On the other hand, the ongoing drop in production could pressure up oil prices. From the demand side, refinery inputs increased while the total supply contracted. As a result, the storage declined again. Moreover, the gap between supply and demand has shifted so that the demand is higher than the supply; this could imply the oil market has tightened again. Looking forward, the upcoming reports regarding U.S China and Europe could offer some additional insight regarding the developments of these economies. The gap between Brent and WTI ranged between $11 and $14 range. The tight oil market in the U.S is likely to pull up the WTI closer to the Brent oil. On the other hand, if the USD pulls back up, this could adversely affect oil price.
The bottom line, on a weekly scale, I guess oil price may resume its upward trend.
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