During last week, crude oil changed direction and traded down despite the deprecation of the USD against the Euro and Aussie dollar. The oil stockpiles declined again during last week by 2.6 M bl. During last week, WTI oil fell by 1.97%; Brent oil, by 2.66%. The gap between the Brent oil and WTI contracted: The difference between Brent and WTI ranged between $21 and $23. Will this downward trend continued next week? During the upcoming week there are several reports and events that may affect the oil market. These reports include: U.S GDP, U.S core durable goods, China and Europe’s flash manufacturing PMI, and EIA oil weekly update.
Here is a weekly outlook and analysis of the crude oil market for October 22nd to 26th:
Oil Prices –October
During last week, crude oil price (WTI) fell by 1.97% and reached by Friday $90.05/b; Brent oil, also decreased by 2.66% to $111.17/b; during October, WTI spot oil fell by 2.32%; Brent oil, by 1.85%.
In the chart below are the developments in WTI and Brent oil prices during the month (prices are normalized to September 28th). As seen, oil traded down during last week and on a monthly scale.
Premium of Brent over WTI –October
The difference between Brent oil and WTI spot oil declined again during last week; it ranged during last week between $21 and $23 per barrel range. During the month the premium edged up by 0.24%.
Oil Stockpiles –Declined by 2.6 Mb
The oil stockpiles fell again during the previous week by 2.6 M bl to reach 1,789 million barrels. The linear correlation between the changes in stockpiles tends to be negative: the linear correlation between oil price and the lagged by one week oil stockpiles is -0.18, this suggests that the price of oil, assuming all things equal, will rally next week. The upcoming report will be published on Wednesday, October 24th and will refer to the week ending on October 19th.
Main Oil Related News Items for the upcoming week
Tuesday – China flash Manufacturing PMI: this index will cover 800 companies in 20 industries in China; based on the HSBC Manufacturing PMI update regarding September 2012 the Manufacturing PMI remained flat at 47.8; this index indicates the shifts in China’s manufacturing sectors growth rate; if the index will rise , this may positively affect commodities;
Wednesday – Flash German, French and Euro Area Manufacturing PMI: In the previous report regarding September 2012, the German PMI rose to 47.3 i.e. the manufacturing conditions are still contracting but at a slightly slower rate. This report serves as an indicator to the economic development 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;
Thursday – U.S Core Durable Goods: This report may indirectly indicate the changes in U.S. demand for crude oil. As of August 2012, new orders of manufactured durable goods declined by $30.1 billion to $198.5 billion; if this report will continue to show a drop in orders then it could pull down not only the US dollar but also commodities prices;
Friday – First U.S GDP 3Q 2012 Estimate: In the recent estimate the U.S GDP during the second quarter expanded by 1.7%; in the 1Q2012 the GDP growth rate reached 1.9% (annual rate). This shows a fall in the growth rate for the US’s GDP. If there will be a sharp shift in the growth rate from Q2 to Q3 this could affect commodities prices.
Foreign Exchange and Oil Prices Relation – October
The EURO/USD currency pair rose last week by 0.56%; further, the AUD/USD also increased by 1.13%. These changes didn’t seem to curb the downfall of oil prices. Nonetheless, there are still positive correlation among these currencies pairs (EURO/USD, AUD/USD) and oil prices. E.g. the linear correlation between the price of oil and EURO/USD was 0.30 during September/October. The relation between AUD/USD and oil prices is 0.48. If the U.S dollar will appreciate against the EURO and Aussie dollar, it may pull down oil prices.
Oil Prices Outlook and Analysis
The difference between Brent and WTI oil slightly decreased during last week and may continue to fall during next week. There are demand and supply forces that could pull the price of oil in different direction. Oil stockpiles fell last week, which could suggest that oil prices in the U.S will rise next week. On the other hand, the stability in OPEC’s oil production and the rise in U.S oil production could suggest the global oil supply side remains stable. The upcoming U.S reports including core durable goods and GDP could affect oil rates. If these reports will show some progress, they could help rally of oil prices. If China’s manufacturing PMI won’t rise, it could pull down the price of oil. I still think that unless there will be a sharp rise in the above-mentioned reports, the price of oil will continue to trade slowly down. Finally, if major currencies including EURO and Aussie dollar will depreciate against the U.S. dollar, then they may also adversely affect oil prices. The bottom line is that I suspect oil prices will slightly fall during the upcoming week.
I speculate during the upcoming week, WTI oil will trade between $87 and $93 and Brent between $109 and $115.
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