Oil price (WTI) bounced back and increased by 1.78% during last week. Conversely, the price of Brent oil edged down by 0.18%. As a result, the gap of Brent oil over WTI narrowed: The premium ranged between $12.69 and $14.95. Last week, the EIA’s weekly update showed a drop in oil’s stockpiles of over 10 million barrels – the sharp drop in oil imports contributed to the fall in oil stockpiles. Will oil continue to rally? This week, several reports may affect oil prices. These items include: U.S and Chinas flash manufacturing PMI, China’s GDP, IEA monthly update, U.S existing home sales, and EIA oil weekly report.
Here is a weekly forecast for the oil market for January 20th to 24th:
Oil Prices – January Overview
During last week, crude oil price (WTI) rose by 1.78% and reached by Friday $94.37/b; on the other hand, Brent oil inched down by 0.18% to $107.06/b;
In the chart below are the daily shifts in WTI and Brent oil prices during the past several months (prices are normalized to January 31st). As seen below, Brent and WTI oil prices decreased during January.
Premium of Brent over WTI – January
The difference between Brent and WTI oil rose last week as it ranged between $12.69 and $14.95 per barrel. During the week, the premium decreased by $1.84 per barrel.
Oil Stockpiles, Demand and Supply
The oil stockpiles changed course and fell by 10.2 MB and reached 1,742.6 million barrels. The linear correlation between the developments in stockpiles has remained stable at -0.2: this correlation suggests that oil price, assuming all things equal, may continue to rise next week. But in order to better understand the fundamentals let’s analyze the developments in supply and demand:
Supply: Oil imports plummeted by 2.7% last week. Conversely, oil production inched up by 0.3%; the total supply decreased by 1.2%;
Demand: Refinery inputs slipped by 0.3% last week. In total, the demand was still higher than the supply. Moreover, due to little decline in demand and sharp fall in supply, the gap between supply and demand widened. This wider gap may pressure up oil prices as the U.S oil market tightens.
The chart below shows the developments in the difference between supply and demand and the price of oil.
If U.S oil market further tightens, this could continue to pull up oil price.
The next weekly report will be released on Wednesday, January 23rd and will pertain to the week ending on January 18th.
OPEC’s Oil production continues to fall
The OPEC report came out last week and showed OPEC’s oil production remained nearly unchanged during last month: OPEC’s production during December reached 29.443 million bbl/d – a 20 thousand bbl/d slip. This modest decline in production is mostly due to Iraq, Venezuela and Saudi Arabia. Libya’s oil production remains low at 261 thousand bbl/d – nearly one fifth of its normal capacity. OPEC’s oil production during December was around 5% lower than the average during 2012. If this low production remains, this could continue to pressure up oil prices mainly Brent oil.
IEA Monthly Report
This upcoming monthly report will present an updated (for December) outlook and analysis for the global crude oil and natural gas market for 2013 and 2014.
The next report will be published on Tuesday, January 21st.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Monday –China Fourth Quarter GDP 2013: In the third quarter of 2013, China grew by 7.8% in annual terms; China’s economy grew by 7.5% in the second quarter of 2013. The current expectations are that the fourth quarter of 2013 grew in annul terms by a similar rate to the previous quarter;
Wednesday – China Manufacturing PMI (flash): HSBC will publish its flash manufacturing PMI survey for January. Last month’s report regarding December 2013 the Manufacturing PMI inched up to 50.5 – i.e. China’s manufacturing sectors is growing but at a slightly slower pace prices;
Thursday –U.S flash manufacturing PMI: This report will show a flash of the monthly changes in the manufacturing sectors during January; as of December, the manufacturing PMI inched up to an index of 54.4;
Oil Outlook and Breakdown
From the supply, the sharp drop in imports and moderate rise in production is likely to pressure up oil prices. In total, the supply contracted last week. From the demand, refinery inputs slightly fell As a result, the storage fell for eleventh time in twelve weeks. Further, the difference between supply and demand has expanded, as the demand remains higher than the supply; this could suggest the oil market has tightened. Looking forward, the upcoming reports regarding U.S and China could offer some additional insight regarding the developments in oil demand in these countries. The difference between Brent and WTI ranged between $12 and $14. The slightly tighter oil market in the U.S is likely to narrow the gap between WTI and Brent oil. Conversely, if the US dollar continues to strengthen, this could pull down oil prices.
The bottom line, on a weekly scale, I guess oil price may continue to slowly rise and the gap between WTI and Brent to remain stable.
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