During last week, crude oil prices rose following the optimism in markets as U.S policymakers were able to avert the fiscal cliff. According to the recent EIA report, oil stockpiles declined by 10MB. During the previous week, WTI oil rose by 2.52%; Brent oil, by 0.62%. As a result, the gap between the Brent oil and WTI narrowed; the difference between Brent and WTI ranged between $18 and $19. Will oil continue to rise next week? During the upcoming week, several publications may affect the oil market. These items include: U.S trade balance, ECB rate decision, China’s trade balance, Germany’s factory orders and EIA oil weekly update.
Here is a weekly projection and analysis for the crude oil market for January 7th to 11th:
Oil Prices – January
During last week, crude oil price (WTI) increased by 2.52% and reached by Friday $93.09/b; Brent oil also rose by 0.62% to $111.31/b; during January, WTI oil rose by 1.38%; Brent oil, by 0.18%.
In the chart below are the changes in WTI and Brent oil prices during recent weeks (rates are normalized to November 30th). As seen, the prices of oil have had an upward trend in recent weeks.
Premium of Brent over WTI – January
The difference between Brent oil and WTI spot oil shrunk again during last week at the range between $18 and $19 per barrel. During the month the premium fell by 5.5%.
Oil Stockpiles – Fell by 10 Mb
The oil stockpiles changed direction and declined by 10 MB and reached 1,784.4 million barrels. The linear correlation between the changes in stockpiles tends to be negative: this correlation suggests that the price of oil, assuming all things equal, will slightly rise next week. The upcoming report will come out on Friday, January 9th and will refer to the week ending on January 4th.
Main Oil Related News Items for the upcoming week
Tuesday – German Factory Orders: This report will pertain to the changes in the factory orders of Germany for November; in the previous report the German factory orders rose by 3.9% (M-o-M);
Tuesday –China’s Trade Balance: as of the previous update, China’s trade balance fell to a $19.6 billion surplus; if the surplus will further dwindle, it could indicate that China’s economic growth is slowing down and thus may adversely affect prices of commodities.
Thursday – ECB Rate Decision: The ECB has ample reasons to cut the rate again: the economic situation in EU isn’t improving, the inflation and monetary development are still stable, the Fed’s stimulus plan pressures up the Euro, and many EU banks continue to struggle. Thus, the ECB might decide to cut the rate by another 0.25pp in the near future. If ECB will cut the rate again, it may adversely affect the Euro to US dollar;
Friday –American Trade Balance: This monthly report for November will show the recent changes in imports and exports of goods and services to and from the U.S, including commodities such as oil; according to the recent American trade balance report regarding October the goods and services deficit rose during the month to $42.2 billion;
Foreign Exchange and Oil Prices Relation – January
The EURO/USD fell last week by 1.11%. Conversely, the AUD/USD rose by 2.55% during last week. This mixed trend may have affected oil prices to change direction by the end of the week and decline. 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 0.56 during December and January. If the U.S dollar will appreciate against the “risk currencies”, it may adversely affect oil prices.
Oil Prices Outlook and Analysis
Following the recent rise of prices of oil during recent weeks, oil prices might continue to slowly rise during next week. The difference between Brent and WTI oil may further shrink to the range of $17-$18 during the week. Oil stockpiles fell again last week, which could suggest oil prices in the U.S will increase this week. The upcoming reports on U.S and China’s trade balance could affect the direction of oil from the projected demand side; therefore if such reports will show growth, they could positively affect the prices of oil. Finally, if major currencies including EURO will continue to depreciate against the U.S. dollar, this may negatively affect oil prices.The bottom line, I guess the prices of oil will slightly increase on a weekly scale.
I guess during the week, WTI oil will trade between $90 and $95 and Brent between $110 and $114.
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