Oil Outlook for April 28- May 2

Oil price (WTI) declined by 3.5% last week. Brent oil remained unchanged. As a result, the gap of Brent oil over WTI widened: The premium ranged between $5.58 and $8.98. Last week, the EIA’s weekly report showed another gain in oil’s stockpiles of 11.5 million barrels. Will oil further fall? This week, several reports may affect oil prices. These items include: U.S GDP, U.S non-farm payroll report, China’s manufacturing PMI, U.S manufacturing PMI, and EIA oil weekly report.

Here is a weekly outlook for the oil market for April 28th – May 2nd:

Oil Prices – April/May Overview

During last week, crude oil price (WTI) declined by 3.5% and reached by Friday $100.60/b; moreover, Brent oil remained nearly the same at $109.58/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 slipped in the past several days.

oil forecast Brent and WTI April 20  2014Premium of Brent over WTI – April/May

The gap between Brent and WTI oilslightly expanded last week as it ranged between $5.58 and $8.98 per barrel. During the week, the premium increased by $3.75 per barrel.

Difference between Brent and WTI April 20  2014Oil Stockpiles, Demand and Supply

The oil stockpiles rose again by 11.5 MB and reached 1,763.5 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.194: this correlation implies that oil price, assuming all things equal, may fall again next week. But in order to better examine the fundamentals let’s consider the changes in supply and demand:

Supply: Oil imports increased by 0.6% during last week. Moreover, oil production rose by 0.5%; the total supply increased by 0.6%;

Demand: Refinery inputs rose by 1.4% last week. In total, the demand remained below the supply, but the difference between supply and demand narrowed. This recent development may pull back up oil prices as the U.S oil market has become slightly tighter than it was a week back. 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 -0.287.

The chart below shows the changes in the difference between supply and demand and the price of oil.

oil market tight loose oil price  April 25If U.S oil market continues to tighten, this could pull up oil price.    

The next weekly report will be released on Wednesday, April 30th and will refer to the week ending on April 25th.

Oil Related News for the Week

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

Wednesday – First U.S GDP 1Q 2014 Estimate: This will be the first estimate of U.S’s first quarter 2014 real GDP growth. In the recent estimate the U.S GDP rose by 2.6% in the fourth quarter of 2013. If the growth rate from fourth quarter of 2013 to the first quarter falls, this could negatively affect oil prices;

Thursday – China Manufacturing PMI: As of March, the Manufacturing PMI inched up to 50.3 – i.e. China’s manufacturing sectors are growing at a faster pace. If in the upcoming report the PMI changes direction and falls, it could signal slowdown in the progress of China’s manufacturing sectors, which may negatively affect oil;

Thursday – U.S Manufacturing PMI: This report will refer to April 2014. In March, the index rose to 53.7; this means the manufacturing is growing at a faster pace; this index may affect crude oil markets;

Friday – U.S. Non-Farm Payroll Report: In the previous employment report referring to March 2014, the number of non-farm payroll employment grew by 192k – close to the number many anticipated; the U.S unemployment rate remained at 6.7%. If the employment growth grows by over 200 thousand (in additional jobs), this may curb down gold and silver and positively affect the U.S dollar and U.S stock markets;

Oil Outlook and Breakdown

From the supply side, the increase in imports and production started to ease down the oil market. From the demand side, refinery inputs rose again at a higher pace. In total, the supply remained above the demand but the gap between the two narrowed. Moreover, the storage increased again. This could suggest the oil market is still loose but has stated to tighten. Looking forward, the upcoming U.S GDP, non-farm payroll and manufacturing PMI reports could offer some input regarding the progress of this world’s leading oil consumer. If these reports don’t meet the market expectations, they could pressure down the price of oil. The difference between Brent and WTI picked up to range between $6 and $9 and is likely to remain at this range.

The bottom line, on a weekly scale, oil might bounce back and rally.   

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