Crude oil prices started off the month of May with sharp falls which were stimulated, in part, by the appreciation of US dollar against major currencies; oil prices gained back some of their value by the end of the month. Will this trend continue or will crude oil prices fall back?
I will present herein the main changes in crude oil prices (WTI and Brent oil) during May, and provide a crude oil prices outlook for June 2011:
During May 2011 WTI spot oil prices fell by 9.43%, and Brent oil price decreased by 7.43%; these rates are following the gains in crude oil prices during March and April. The average prices in May also fell by 7.9% for WTI spot oil and 6.9% for Brent oil compared with April’s.
The chart above is normalized to 100= May 2nd for both major energy commodities (Brent oil and WTI spot oil). The chart shows the sharp falls in crude oil prices at the beginning of May.
The daily prices had a sharp rise in the standard deviation during May. The standard deviations of the WTI oil and Brent oil daily prices rose to nearly the same values they were back in February, when crude oil prices inclined sharply due to the turmoil in Middle East including Egypt and then Libya.
These figures indicate that crude oil prices’ volatility inclined during May compared with April and March.
Brent oil premium over WTI spot oil
The Difference between the two commodities fluctuated during May and ranged between $12 and $17. Its standard deviation reached $1.53 compared with $1.58 during April 2011.
Crude oil prices and US Dollar
The sharp falls at the beginning of May were related, in part, to the sharp rises in U.S. dollar compared with other major currencies.
During May there were high correlations among daily percent crude oil prices (WTI and Brent oil) and EUR/USD, AUD/USD and USD/CAD.
During the month, EUR/USD fell by 2.78%; AUD/USD declined by 2.73%; and USD/CAD rose by 2.47%. These figures show that US dollar gained value during the month. The correlations between these exchange rates and major crude oil prices show that they were probably linked.
Despite the high correlations presented above, these relations aren’t reliable as they vary each month.
Gold and Silver prices vs. Crude oil prices
During May, the major commodities were strongly correlated as crude oil price (WTI) daily percent changes were strongly correlated with gold and silver prices. The last time there was a similar strong correlation was during January when the averages crude oil, gold and silver prices fell compared with the averages during December.
Crude oil prices and the S&P500 index
In the last couple of months there were strong positive linear correlations between S&P500 index and crude oil prices:
The correlations were strong as crude oil prices and S&P500 fell at the beginning of May and by the end of the month started to pick up.
The abovementioned findings suggest that crude oil was strongly linked with the US stock market and other major commodities (gold and silver).
Crude Oil price forecast for June 2011:
Let analyze the crude oil market from the supply, demand and macro perspective:
OPEC meeting and oil supply perspective
One of the main concerns continues to come from the supply side: in the recent OPEC meeting on June 8th, the members didn’t reach an agreement as to raising the oil production quota, despite the drop in Libya’s oil production. As a result, Saudi Arabia suggests it will raise its oil production despite the disagreement among members in the recent OPEC meeting.
EIA’s outlook for 2011 and 2012 state that if OPEC won’t raise its oil production, this might further tighten the crude oil market and could push up crude oil prices in 2011.
Crude oil demand perspective
The winter is long behind us, but the driving season is upon us; according to the IEA, during the third quarter in the last couple of years, the world oil demand inclined compared with the second quarter. This progress is expected to be the case this year as well. There are some considerations that could curb the growth of the crude oil demand including the slowdown in U.S., Europe, Japan and China.
Also, the high crude oil prices compared with natural gas prices (see chart below) might also further push the demand from crude oil to natural gas, where possible.
I still think that the crude oil market will continue to rise, but at a much slower pace than it did in the previous months.
Crude oil macro economic perspective
The correlation of crude oil prices with major commodities, indexes and US dollar, might continue to prevail, but these correlations fluctuate during the year and aren’t too reliable.
If there will be a sharp movement in the financial market, as was the case with the appreciation of the US dollar at the beginning of May, this might also affect crude oil prices. Currently, there is no news in sight that might cause such a shift; nonetheless, if the Fed will consider issuing a new stimulus plan as the current quantitative easing will end in June, this might depreciate US dollar and drive crude oil prices up again.
I speculate that the difference between Brent oil and WTI will continue to remain around the $12 to $17, and until that crude oil prices will moderately incline during the month, but won’t be to far from their current position of $100 for WTI crude oil price and $117 for Brent oil price.
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