The prices of oil (WTI and Brent) fell again during the past week: WTI slipped by 1.72%; Brent oil, by 0.54%. As a result, the gap of Brent oil over WTI slightly widen: The premium ranged between $4.57 and $6.18. According to the latest EIA weekly report, oil stockpiles moderately increased by 1.48Mb. In the U.S, imports declined again last week, while production slightly rose. Refinery inputs slightly dropped. Will oil continue to fall next week? This week, several reports may affect the oil market. These items include: U.S employment report, U.S and China’s manufacturing PMI, and EIA oil weekly report.
Here is a weekly outlook and analysis for the oil market for September 30th to October 4th:
Oil Prices – September/October
During last week, crude oil price (WTI) fell again by 1.72% and reached by Friday $102.87/b; further, Brent oil also slipped by 0.54% to $108.63/b;
In the chart below are the daily changes in WTI and Brent oil rates during the year (prices are normalized to January 31st). As seen below, oil prices have declined in the past several weeks.
The spread between Brent and WTI oil slightly expanded last week as it ranged between $4.57 and $6.18 per barrel. Moreover, during the week, the premium rose by $1.21 per barrel.
The oil stockpiles changed direction and fell by 1.48 MB and reached 1,816.7 million barrels. Regarding the progress of stockpiles, the EIA’s latest weekly update includes an analysis to better understand the potential effect of changes in stockpiles on price of oil. The main issue worth noticing is that referring to changes in stockpiles without the changes in supply and demand isn’t sufficient.
The linear correlation between the changes in stockpiles has remained stable at -0.194: this correlation suggests that oil price, assuming all things equal, may decline next week. But in order to better understand the changes in fundamentals let’s also look at the shifts in supply and demand:
Supply: Oil imports declined again by 1.4% last week. The weekly shifts in oil imports have a mid-strong negative correlation (-0.251) that suggests oil price may increase next week. Conversely, oil production rose again by 0.5%;
Demand: Refinery inputs slightly declined by 0.3% last week. In total the demand remained higher than the supply; furthermore, the gap has slightly expanded – this may keep oil prices elevated and suggest the oil market in the U.S will further tighten.
The chart below shows the changes in the gap between supply and demand (below zero: Demand is above Supply; above zero: Supply is above Demand).
The next weekly update will come out on Wednesday, October 2nd and will pertain to the week ending on September 27th.
Middle East and Oil – update
The tensions in Syria continue but this news seems to have lost some steam so that its adverse effect on oil prices has diminished. Conversely, Libya’s ongoing low oil exports, which are around 150k of barrels a day – in 2010 this country produced 1.6 million barrels a day, may keep oil prices elevated and perhaps further expand the gap between Brent and WTI.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday – China Manufacturing PMI: If the updated PMI index remains high or even exceed the flash index, this will suggest China’s manufacturing conditions are growing. Moreover, this shift could have a positive effect on the price of oil;
Tuesday – U.S. Manufacturing PMI: Back in August, the index slightly increased to 55.7%; this means the manufacturing is growing at a slightly faster rate; this index may affect crude oil markets;
Thursday – U.S Factory Orders: This report will refer the developments in U.S. factory orders of manufactured durable goods during September; in the previous report factory orders fell by 2.4%; this serves as another indicator for the progress of the U.S economy;
Friday – U.S. Non-Farm Payroll Report: in the latest employment report for August 2013, the labor market slightly expanded again: The number of non-farm payroll employment increased by 169k – lower than the number many had expected; the U.S unemployment rate inched down to 7.4%; if the employment increase again by over 150 thousand (in additional jobs), this may pull back down gold and silver and positively affect the U.S dollar and U.S stock markets;
Oil Price Outlook and Breakdown
From the supply side, the sharper drop in oil imports and despite the slight rise in production resulted in the supply slightly falling. From the demand side, refinery inputs slightly fell. In total, the gap between supply and demand slightly has widen, which could suggest the oil market is tightening. Nonetheless, the gap remains low compared to its state a few months back. Looking forward, the upcoming U.S reports could offer some additional information regarding the potential rise in demand for oil. These reports include factory orders, manufacturing PMI and non-farm payroll reports. If these reports exceed expectations, they may pull back up oil prices. China’s manufacturing PMI could also pull up oil prices if this index rises again. The gap between Brent and WTI may remain around the $4-$6 until new developments in the Middle East or Libya will unfold. Finally, the fundamentals suggest oil prices should keep falling in the mid-term as long as tensions in the Middle East are under control and the gap between supply and demand doesn’t sharply expand.
The bottom line, on a weekly scale, I guess oil price will continue to slowly decline.
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