Crude Oil Prices – Weekly Outlook January 2-6

Crude oil prices slightly declined during the last week of 2011, but this week we are entering a new year and the direction of crude oil prices may change. For the first week of 2012, let’s examine what is up ahead for the crude oil market.  Here’s an outlook and analysis of the crude oil market for the week of January 2nd to January 6th:

Crude Oil Prices – December Update

On Friday, December 30th crude oil price (WTI) slightly fell by 0.82% to $98.83/b; Brent oil price also declined by 0.69% to $107.58/b; during December WTI spot oil decreased by 1.52% and Brent oil price by 3.36%.

The chart below presents the development of WTI spot oil and Brent oil prices during the month (prices are normalized to November 30th). It shows the decline and rise of both crude oil prices during the month.

Crude spot oil price forecast 2011 Brent oil and WTI spot oil  2011 January 2Premium of Brent over WTI – December Update

The premium of Brent oil over WTI spot oil continued to decline during most of last week and reached on Friday to $8.75. Furthermore, during December the premium sharply decreased by 20.16%.

Difference between Brent and WTI crude spot oil price forecast 2011 January 2Despite the decline in the premium of Brent oil over WTI oil prices, the correlation between the daily percent changes of Brent oil price and WTI oil price reached new highs in December. This means that the relation between WTI and Brent oil prices has tightened (see below the chart of the development of crude oil prices’ linear correlations).


Correlations wti and Brent crude spot oil prices  JAN 2011- December 2011 January 2-6

Main Oil Related News Items

U.S. ISM Manufacturing PMI: This report will present the monthly change in manufacturing sector on a national level for December 2011. During November the index sharply rose to 52.7% a 1.9 percent point increase compared to October’s index; this index might affect crude oil markets (see here my review of last report);

U.S. Factory Orders: This monthly report will examine the changes in U.S. factory orders of manufactured durable goods during November. This report may indirectly signal the changes in U.S. demand for commodities such as crude oil.  According to the recent flash report, during November new orders of manufactured durable goods increased by $7.5 billion or 3.8% to $207.0 billion (for the full report);

U.S. Non-farm Employment Report: in the December report regarding November, the labor market continues to rally as the number of non-farm payroll employment rose by 120k; the U.S unemployment rate slipped to 8.6%. This report could affect commodities prices (see my last review on the U.S labor report).

Crude oil Stockpiles – Slightly Rose Last Week  

U.S. Petroleum and crude oil stockpiles changed direction and rose during last week by 3.1 million barrels and reached 1,736.86 million barrels. The current oil stockpiles are below the quota from last year: the current crude oil stockpiles are 59.671 million barrels below oil stockpiles levels recorded during the same week in 2010. The next crude oil stockpiles report will be published on Thursday, January 5th.

 Forex Exchange Rates Market and Oil Prices – December

The EURO/USD exchange rate continued its downward tend during last week of 2011 and declined by 0.64%, while AUD/USD fell by 0.56%; the strong relation between crude oil prices and Australian dollar/ US dollar might have be among the factors to pull down oil prices.  If the U.S dollar will further strengthen against the Euro and AUD during the upcoming week, it may affect crude oil to trade down.

U.S. Stock Market / Crude Oil Prices – December

The S&P500 index slightly declined during the last week of 2011 by 0.61% to reach 1,257 on Friday; during 2011 there were strong positive correlations between crude oil prices and S&P500 index (e.g. during December the correlation with WTI oil price was 0.611 and with Brent oil 0.619). The chart below presents the changes in the linear correlations between crude oil prices and S&P500 index during recent months.

If the American stock market indexes will rally during the week and recover from the falls during the last week of December, this may also push up crude oil prices.

Correlations wti and Brent spot oil prices with S&P500 April  December January 2 2011

Crude Oil Prices Forecast and Analysis:

Crude oil prices made a comeback during the second part of December, after they had declined during the first couple of weeks of December.

In the first week of the year there are many news items that could affect the financial markets and consequently also the crude oil market; if the U.S. reports will be positive including the U.S. non-farm labor report, they might positively affect the American stock market and along with it the crude oil market. There might also be a “January effect“, which could push up not only American stock markets, but also crude oil prices. On the other hand, if the major exchange rates such as EURO, AUD and CAD will depreciate against the U.S. dollar, they may curb the rally of crude oil prices.

I speculate that during the first week of 2012, WTI oil price will revolve around $97-$105 mark and Brent oil price around $106-$113.    

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Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.