Oil Outlook for June 2-6

The oil market slightly eased down as oil prices (WTI and Brent) moderately declined during last week. WTI slipped by 1.6%; Brent oil declined by 1%. As a result, the gap of Brent oil over WTI slightly widened by the end of the week; the premium ranged between $5.91 and $7.09. Last week, the EIA’s weekly report showed a buildup in oil’s stockpiles of 3.2 million barrels. Will oil price bounce back and resume their rally? This week, several reports may affect the oil market including U.S NF payroll report, U.S manufacturing PMI, ECB rate decision and EIA oil weekly report.

Here is a weekly outlook for the oil market for June 2nd – June 6th:

Oil Prices – May/June

During last week, crude oil price (WTI) declined by 1.6% and reached by Friday $102.71/b; moreover, Brent oil slipped by 1% to reach $109.41/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).

oil forecast Brent and WTI May 24 2014Premium of Brent over WTI – May/June

The difference between Brent and WTI oilwas in the range between $5.91 and $7.09 per barrel. During the week, the premium rose by $0.51 per barrel.

Difference between Brent and WTI May 24  2014Oil Stockpiles, Demand and Supply

The oil stockpiles rose again by 3.2 MB and reached 1,783.75 million barrels. The linear correlation between the changes in stockpiles has remained around -0.208: this correlation implies that oil price, assuming all things equal, may fall again next week. But in order to better examine the fundamentals let’s consider the changes in supply and demand:

 

Supply: Oil imports rallied by 1.2% during last week. Moreover, oil production declined by 0.4%; the total supply, however, increased by 0.7%;

Demand: Refinery inputs inched down again by 0.2% last week. In total, the demand was still higher than the supply but the gap between the two slightly narrowed. This recent development may keep pressure down oil prices as the U.S oil market further loosens. 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 -0.268.

The chart below shows the developments in the difference between supply and demand and the price of oil.

oil market tight loose oil price  May 24The next weekly report will be released on Wednesday, June 4th and will refer to the week ending on May 30th.  

Oil Related News for the Week

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

Monday – U.S Manufacturing PMI: This report will refer to May 2014. In April, the index rose to 54.9; this means the manufacturing is growing at a faster pace; this index may affect stock markets, USD, and crude oil and natural gas markets;

Friday – U.S. Non-Farm Payroll Report: In the last employment report referring to April 2014, the number of non-farm payroll employment grew by 288k – higher than the number many anticipated; the U.S unemployment rate plummeted to 6.3%;

 

Oil Outlook and Breakdown

From the supply side, the recent rally in imports and ongoing buildup in production are likely to loosen the oil market. Conversely, from the demand side, refinery inputs slightly rose. In total, the demand remained higher than the supply but the gap between the two slightly narrowed. The difference between Brent and WTI remained in range between $5 and $7 and is likely to slightly contract further to the $5 and $6 range.

The bottom line, on a weekly scale, oil is likely to moderately decline, unless the upcoming U.S reports show a higher than anticipated progress.   

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