Oil Outlook for May 26-30

Oil prices (WTI and Brent) continued its upward trend during the previous week. WTI rose again by 2%; Brent oil inched up by only 0.1%. As a result, the gap of Brent oil over WTI narrowed: The premium ranged between $7.25 and $6.19. Last week, the EIA’s weekly report showed a modest buildup in oil’s stockpiles of 1.5 million barrels. Will oil price further advance? This week, several reports may affect the oil market. These items include: U.S core durable goods, China’s manufacturing PMI, U.S GDP and EIA oil weekly report.

Here is a weekly outlook for the oil market for May 26th – May 30th:

Oil Prices – May Review

During the previous week, crude oil price (WTI) rose again by 2.3% and reached by Friday $104.35/b; moreover, Brent oil inched up by 0.1% to reach $110.54/b;

In the chart below are the daily changes in WTI and Brent oil prices during the past several months (prices are normalized to December 31st, 2013). As you can see, WTI oil had an upward trend in the past couple of weeks.

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

The gap between Brent and WTI oilnarrowed last week as it ranged between $7.25 and $6.19 per barrel. During the week, the premium decreased by $2.21 per barrel.

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

The oil stockpiles slightly increased by 1.5 MB and reached 1,780.03 million barrels. The linear correlation between the changes in stockpiles has remained around -0.204: this correlation suggests that oil price, assuming all things equal, may slightly decline next week. But in order to better examine the fundamentals let’s consider the changes in supply and demand:

Supply: Oil imports tumbled down by 4.5% during last week. Moreover, oil production inched up again by 0.2%; the total supply, however, decreased by 2%;

Demand: Refinery inputs remained unchanged last week. In total, the demand was higher than the supply. This recent development may keep pressuring up oil prices as the U.S oil market further tightens. 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 -0.278.

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 24If U.S oil market further tighten, this could keep pushing up oil prices.    

The next weekly report will be released on Thursday, May 29th and will refer to the week ending on May 16th.

Oil Related News for the Week

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

Tuesday – U.S Core Durable Goods: This monthly report regarding April may indicate the developments in U.S demand for commodities including oil and gas. As of March 2014, new orders of manufactured durable goods increased to $236.04 billion – a 1.1% rise compared to February;

Thursday – Second U.S GDP 1Q 2014 Estimate: This will be the second estimate of U.S’s first quarter 2014 real GDP growth. In the early estimate, the U.S GDP grew by only 0.1% in the first quarter;

Friday – China Manufacturing PMI: As of April, the Manufacturing PMI inched up to 50.4 – i.e. China’s manufacturing sectors are growing at a faster rate; 

Oil Outlook and Breakdown

From the supply side, the plunge in imports may further tighten the oil market. The modest gain in production didn’t put a dent in the sharp fall in imports. Conversely, from the demand side, refinery inputs didn’t rise. In total, the demand remained higher than the supply and the gap between the two only expanded. The gap between Brent and WTI contracted to range between $6 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 further rise.   

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