Oil Weekly Outlook For October 1-5

During last week, crude oil prices shifted with an unclear trend as the price of WTI oil slipped while Brent oil edged up. Due to the different paths these oil prices followed, the gap between the Brent oil and WTI widen again: The difference between Brent and WTI ranged between $19 and $21. During last week, WTI oil declined by 0.45%; Brent oil rose by 0.86%. The oil stockpiles declined during last week by 11.4 M bl.

During the upcoming week there are several reports and events that may affect the oil market including: U.S manufacturing PMI, non-farm payroll report, Bernanke’s speech and minutes of the FOMC meeting.

Here is a weekly outlook and analysis of the crude oil market for October 1st to 5th:

Oil Prices – September/October

During last week, crude oil price (WTI) declined by 0.45% and reached by Friday $92.19/b; Brent oil, however, rose by 0.86% to $113.26/b; during September, WTI spot oil fell by 4.44%; Brent oil, by 1.91%.

In the chart below are the changes in WTI and Brent oil prices during the past several weeks (prices are normalized to August 31st). As seen, oil prices nearly didn’t move much during last week.

oil forecast Brent and WTI spot rates  2012 October 1

Premium of Brent over WTI – September/October

The difference between Brent oil and WTI spot oil sharply increased ranged during last week between $19 and -$21 per barrel range. During the month the premium rose by 10.95%.

Difference between Brent and WTI  October 1 2012

Oil Stockpiles –Declined by 2.6 Mb

The oil stockpiles decreased during the previous week by 2.6M bl to reach 1,798.8 million barrels. Since the linear correlation between the changes in stockpiles tends to be negative, the linear correlation between oil price and the lagged by one week oil stockpiles is -0.19, this suggests that the price of oil, assuming all things equal, will rally this week.  The upcoming report will be published on Wednesday, October 3rd and will pertain to the week ending on September 27th.

Main Oil Related News Items for the upcoming week

Monday – U.S. ISM Manufacturing PMI: In August, the index edged down to 49.6%, which means the manufacturing is still contracting; this index may affect oil and natural gas prices;

Thursday – Minutes of September’s FOMC Meeting: In the recent FOMC meeting it was decided to launch QE3, and to extend the Fed’s pledge of keeping the short term rates low until mid-2015. The minutes of the recent FOMC meeting might add some additional perceptive and insight behind this decision and the future steps of the FOMC especially in anticipation of the upcoming FOMC meeting at the end of October;

Friday – U.S. Non-Farm Payroll Report: in the September report 2012, the labor market expanded by a lower than expected rate: the number of non-farm payroll employment rose by 96k; the U.S unemployment rate slipped to 8.1%; if the upcoming report will continue to show little growth of below 120 thousand (in additional jobs), this may raise the chances of the Fed introducing additional stimulus plan in the near future; this report may affect oil prices;

Foreign Exchange and Oil Prices Relation – September

The EURO/USD currency pair also declined last week by 0.94%; further, the AUD/USD also fell by 0.74%. These falls may have pulled down the prices of oil. Further, there are still positive correlation among these currencies pairs (EURO/USD, AUD/USD) and crude oil price. E.g. the linear correlation between the price of oil and Euro/USD was 0.51 during September. If the U.S dollar will continue to rise against the EURO and Aussie dollar, it may pull down oil prices.

Oil Prices Outlook and Analysis

The difference between Brent and WTI oil rose during last week and may continue to rise during the upcoming week. Oil stockpiles fell last week, which could suggest that oil prices in the U.S will change direction and trade up this week. The upcoming U.S reports including U.S non-farm payroll and manufacturing PMI could affect oil rates. If these reports will show little progress, they could pull down oil prices. On the other hand, if Bernanke or the minutes of the recent FOMC meeting will refer to the Fed’s future step to help the economy and refer to additional monetary steps this could rally oil price. Finally, if major currencies including EURO and Aussie dollar will change direction and appreciate against the U.S. dollar, then they may also pull up oil prices. The bottom line is that I suspect oil prices might rally from last week’s fall but not by much.

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