Oil Weekly Outlook For January 21-25

During last week, crude oil price resumed its upward trend. According to the recent EIA report, oil stockpiles rose by 3.7MB. During last week, WTI oil rose by 2.14%; Brent oil inched down by 0.03%. As a result, the gap between the Brent oil and WTI narrowed; the difference between Brent and WTI ranged between $15 and $17. Will oil continue to rise next week? The recent developments in Algeria including the hostage situation and the killed oil workers raised the speculations again for a slowdown in oil production in this OPEC member country.  Algeria’s oil production is nearly 1.2 million bl/d and has the third largest oil reserves in Africa. During the upcoming week, several publications may affect the oil market. These items include: China’s manufacturing PMI, Germany’s manufacturing PMI and EIA oil weekly update.

Here is a weekly projection and analysis for the crude oil market for January 21st to 25th:

Oil Prices – January

During last week, crude oil price (WTI) increased by 2.14% and reached by Friday $95.56/b; Brent oil edged down by 0.03% to $110.61/b; during January, WTI oil rose by 4.07%; Brent oil decreased by 0.45%.

In the chart below are the changes in WTI and Brent oil prices during the month (rates are normalized to December 30th). As seen, the prices of oil (WTI) have had a moderate upward trend in recent weeks.

oil forecast Brent and WTI spot rates  January 21-25  2013Premium of Brent over WTI – January

The difference between Brent oil and WTI spot oil narrowed again during last week at the range between $15 and $17 per barrel. During the month the premium fell by 21.98%.

Difference between Brent and WTI January 21-25   2013

Oil Stockpiles – Rose again by 3.7 Mb

The oil stockpiles rose again by 3.7 MB and reached 1,799.1 million barrels. The linear correlation between the changes in stockpiles is still negative: this correlation implies that the price of oil, assuming all things equal, will slightly decline next week. The upcoming report will be published on Wednesday, January 23rd and will refer to the week ending on January 18th.

OPEC Production Inched Down in December

Based on the recent OPEC Report, OPEC’s oil production edged down by 464 thousand bbl/d to reach 30,365 in December. This news suggest the oil supply has slightly declined during last month, which could have tightened in recent weeks. If this trend will continue, it could further pressure up the price of oil.

IEA Monthly Report

Based on the recent monthly update, the global oil supply declined in December to reach 91.2 million bbl/d. In 2013, the non-OPEC supply is expected to rise by 980 thousand bbl/d  – the highest growth rate since 2010. Moreover, the global demand also expected to rise and reach 90.8  million bbl/d – a 1% gain from 2012. OECD inventories declined again during November and global refineries rose by 1.5 million bbl/d to reach 75.9 million bbl/d in the fourth quarter of 2012.

These figures suggest not only the supply is expanding but also the demand for oil. If the demand will further rise, this could also pull up the price of oil.

Main Oil Related News Items for the upcoming week

Wednesday – China flash Manufacturing PMI: this index will cover 800 companies in 20 industries in China; based on the HSBC Manufacturing PMI report regarding December 2012 the Manufacturing PMI inched up to 50.9; this index indicates the developments in China’s manufacturing sectors growth rate; if the index will further increase, this may positively affect commodities prices;

Thursday– Flash German, French and Euro Zone Manufacturing PMI: In the previous report regarding December 2012, the German PMI slipped to 46 i.e. the manufacturing conditions are contracting at a slightly faster rate. This report serves as an indicator to the economic shifts of the Euro Area’s leading economies’ manufacturing conditions; this news, in turn, may affect the Euro/USD currency pair and consequently also major commodities rates;

Foreign Exchange and Oil Prices Relation – January

The EURO/USD edged down last week by 0.16%. Further, the AUD/USD also slipped by 0.24% during last week. This downward trend may have curbed the rally of oil prices during the week. The correlations among these currencies pairs (Euro/USD) and oil prices are still positive and robust. E.g. the linear correlation between the price of oil and EURO /USD was 0.38 during December and January. If the U.S dollar will change direction and depreciate against the “risk currencies”, it may pull up oil prices.

Oil Prices Outlook and Analysis

Following the recent modest rise in the price of oil during last week, oil prices might continue their rally on account of the recent speculations around the developments in Algeria. The recent positive reports   regarding the progress of China and U.S economies from last week may have also helped rally oil prices. The rise in the stock market and colder than expected weather in the U.S are additional factors that suggest the demand for oil will continue to rise in the weeks to follow. On the other hand, the difference between Brent and WTI oil may further narrow to the range of $14-$16 during the week. Oil stockpiles increased last week, which could pressure down oil prices in the U.S this week. The upcoming reports on EU and China’s manufacturing PMI could affect the direction of oil from the projected demand side; therefore if such reports will show growth, they could positively affect oil prices. Finally, if major currencies including EURO will change direction and appreciate against the U.S. dollar, this may pull up oil prices.The bottom line, I guess the prices of oil will slightly rise on a weekly scale.

I guess during the week, WTI oil will trade between $95 and $100 and Brent between $110 and $114.

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