Oil Outlook for May 19-23

Oil price (WTI and Brent) rallied during last week. WTI increased by 2%; Brent oil, by 2.3%. As a result, the difference of Brent oil over WTI slightly widened: The premium ranged between $7.54 and $8.94. Last week, the EIA’s weekly report showed a modest rise in oil’s stockpiles of 2.1 million barrels. Will oil price keep rising? This week, several reports may affect the oil market. These items include: Minutes of FOMC meeting, China’s manufacturing PMI, and EIA oil weekly report.

Here is a weekly outlook for the oil market for May 19th – May 23rd:

Oil Prices – May Overview

During the previous week, crude oil price (WTI) rose by 2% and reached by Friday $102.02/b; moreover, Brent oil also increased by 2.3% to reach $110.42/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 slightly rallied in the past week.

oil forecast Brent and WTI May 16  2014Premium of Brent over WTI – May

The difference between Brent and WTI oilslightly widened last week as it ranged between $7.54 and $8.94 per barrel. During the week, the premium increased by $0.50 per barrel.

Difference between Brent and WTI May 16  2014Oil Stockpiles, Demand and Supply

The oil stockpiles slightly rose by 2.1 MB and reached 1,779.03 million barrels. The linear correlation between the changes in stockpiles has remained around -0.204: this correlation suggests that oil price, assuming all things equal, may slightly decline next week. But in order to better examine the fundamentals let’s consider the changes in supply and demand:

Supply: Oil imports fell by 3.8% during last week. Moreover, oil production increased again by 0.4%; the total supply decreased by 1.6%;

Demand: Refinery inputs inched up by 0.1% last week. In total, the demand grew higher than the supply for the first time since the middle of January. This recent development may push back up oil prices as the U.S oil market has become 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 -0.275.

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

oil market tight loose oil price  May 16If U.S oil market continues to tighten, this could pull back up oil price.    

The next weekly report will be released on Wednesday, May 21st and will refer to the week ending on May 16th.

OPEC’s production slightly rose in April

According to the recent OPEC Report, OPEC’s oil production modestly rose by 130.8 thousand bbl/d to reach 29,593 thousand bbl/d in April. Most of the rise comes from higher Iraqi production. Libya’s oil production remains low at 238 thousand bbl/d. This news suggests the oil supply has slightly grew, which could have loosened the oil market. If this trend will persist, it could further pressure up the price of oil.

IEA Monthly Report

Based on the recent monthly update, in April, the global oil supply rose by 700 thousand bbl/d to reach 92.1 million bbl/d mainly due to rise in OPEC countries’ production. The global demand outlook has slightly rose to 92.8 million bbl/d during the year. If the demand forecast keeps rising, this could push up oil prices.

Oil Related News for the Week

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

Wednesday – Minutes of FOMC Meeting: Back in April, the FOMC meeting decided to taper again its asset purchase program by $10 billion to a pace of $45 billion a month. Since then, the U.S dollar depreciated against the Japanese yen and Aussie dollar. The upcoming minutes might shed some light on this decision, the FOMC’s future monetary steps and especially the decision process about setting the timing for raising its interest rate;

Thursday – China Manufacturing PMI (flash): Last month’s report referring to April 2014 the Manufacturing PMI rose to 48.3 – i.e. China’s manufacturing sectors is contracting at a slower rate. If in the upcoming update the PMI index remains below 50, it means China’s manufacturing sector isn’t growing;

Oil Outlook and Breakdown

From the supply side, the ongoing fall in imports may further tighten the oil market. The rise in production didn’t offset the plunge in oil imports. From the demand side, refinery inputs continue to slowly rise. In total, the tables have turned and now the demand is higher than the supply. Nonetheless, the storage slightly increased again. The gap between Brent and WTI remained between $7 and $9 and is likely to remain around this range.

The bottom line, on a weekly scale, oil is likely to keep slowly progressing.   

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