Oil prices (WTI and Brent) rallied last week. WTI and Brent oil rose by 2.2% and 1.1%, respectively. As a result, the difference of Brent oil over WTI narrowed again: The premium ranged between $6.4 and $7.46. Last week, the EIA’s weekly report showed a rise in oil’s stockpiles of 5.5 million barrels. Will oil continue to rise? This week, several reports may affect oil prices. These items include: U.S factory orders, China’s manufacturing PMI, U.S non-farm payroll report, U.S manufacturing PMI, and EIA oil weekly update.
Here is a weekly outlook for the oil market for March 31st to April 4th:
Oil Prices – March Overview
During last week, crude oil price (WTI) increased by 2.2% and reached by Friday $101.67/b; moreover, Brent oil rose by 1.1% to $108.07/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 rallied past several days.
The gap between Brent and WTI oil narrowed last week as it ranged between $6.4 and $7.8 per barrel. During the week, the premium slipped by $1.06 per barrel.
The oil stockpiles rose by 5.4 MB and reached 1,734.2 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.207: this correlation suggests that oil price, assuming all things equal, may decline next week. But in order to better analyze the fundamentals let’s examine the changes in supply and demand:
Supply: Oil imports rose by 2% last week. Furthermore, oil production slightly rose by 0.4%; the total supply increased by 1.2%;
Demand: Refinery inputs slipped by 0.3% last week. In total, the demand remained well below the supply, and the gap between supply and demand widened. This turn of events may drag down oil prices as the U.S oil market is looser than it was last week. After all, the linear correlation between the weekly price of oil lagged by on period and the shifts in the gap between supply and demand is mid-strong and negative at -0.305.
The chart below shows the changes in the gap between supply and demand and the price of oil.
The next weekly report will be released on Wednesday, April 2nd and will pertain to the week ending on March 28th.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday – China Manufacturing PMI: As of February, the Manufacturing PMI inched down to 50.2 – i.e. China’s manufacturing sectors are still growing but at a slower pace. If in the upcoming report the PMI declines again, it could signal slowdown in the progress of China’s manufacturing sectors, which could also negatively affect oil;
Tuesday – U.S Manufacturing PMI: This report will refer to March 2014. In February, the index bounced back to 53.2; this means the manufacturing is growing at a faster pace;
Wednesday – U.S Factory Orders: This report will refer to the changes in U.S. factory orders of manufactured durable goods during March; in the latest report factory orders declined by 0.7%; this report will offer some insight regarding the progress of the U.S economy;
Thursday – Australian Retail Sales: This monthly update will refer to February 2014. In the recent report, the seasonally adjusted retail sales rose by 1.2% during January; this news may affect the Aussie dollar, which tends to be correlated with oil and gold prices;
Friday – U.S. Non-Farm Payroll Report: In the last employment report regarding February 2014, the labor market grew again: The number of non-farm payroll employment rose by 175k – higher than the number many had expected; the U.S unemployment rate inched up to 6.7%. If the employment growth exceeds 150 thousand (in additional jobs), this may pull up oil prices;
Oil Outlook and Breakdown
From the supply standpoint, the recent rally in imports and modest gain in production resulted in a sharp rise in oil supply. From the demand standpoint, refinery inputs continue to slowly decline. Moreover, the storage rose. In total, the supply was higher than demand and the difference between the two expanded again. This could suggest the oil market has loosened. Looking forward, the upcoming reports referring to the U.S and China could offer some information regarding the progress in the demand for oil. If these reports are mostly positive, this could pressure back up the price of oil. The gap between Brent and WTI ranged between $5 and $10 and is likely to remain at this range.
The bottom line, on a weekly scale, Oil might slightly decline in the near future.
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