Following the rapid falls in crude oil prices during last week, oil prices bounced back with moderate rises yesterday and are currently continue to moderately rise. What is headed for oil prices today?

Let’s examine the recent news related to the crude oil market for today, May10th:

Crude oil prices – May

Yesterday, crude oil prices rose for the first time this month by a very sharp rate of 5.53%; During May, up to yesterday May 9^th, WTI spot oil decreased by 9.6%;

Brent oil price also inclined sharply yesterday by 5.31%, but during May Brent oil declined by 8.6%.

The premium of Brent oil over WTI reached on yesterday 13.13$/b.

 

Despite the rapid fluctuations in crude oil prices, the premium of Brent oil over WTI spot oil remained around the 10 and 14$ during May. In fact the current correlation between WTI and Brent oil is very high at 97%. This rate isn’t significant and is likely to drop during the rest of the month, but does show the linkage of these two commodities prices.

I still think that the premium will moderately fluctuate, but will remain around a double figure gap ranging between 10 and 13 USD.

CME raised the margin on crude oil contracts

One of the news that probably caused the shift in crude oil prices was that the CME group raised the margin required on U.S. crude oil futures by 25 and Brent oil futures by 23.8%; this new situation will come into play by the end of the business day (May 10^th).

This decision came in attempt by CME to curb the “speculative money” to further affect very rapidly the crude oil prices.

At the beginning of last week, CME decided to raise the margins on silver futures contracts; the reaction soon followed as silver price declined by 27% during last week.

This is probably among the major reasons for the sudden shift in oil prices direction today.

 

The effect of EURO/ US dollar on crude oil

During last week, the drastic decline of crude oil prices was related, in part, to the appreciation of the USD compared to major currencies including the Euro.

The chart below shows the strong correlation of EURO/USD with crude oil prices including WTI spot oil and Brent oil.

Granted, we only have very few samples in May, and as such the correlations are likely to change during the month and are likely not significant, however this gives some perspective on the strong link the major exchange rates had during last week with the changes in crude oil prices (Brent oil and WTI spot oil).

 

The reasons for the high volatility in Euro/US dollar exchange rate might be:

(From the Euro side)

1. The concerns around the debt crisis in Europe especially Greece, Ireland Portugal;
2. The change in policy direction of ECB as Jean-Claude Trichet didn’t raise the interest rate of ECB and the rate remained at 1.25% in an attempt to keep the US dollar strong;

(From the US dollar)

1. The speculation around the next move the Federal Reserve will do after the quantitative easing plan will end in June;
2. The stronger than expected U.S. employment report of April.

These reasons are probably among the main factors that caused and will continue to affect the Euro/USD and consequently the crude oil prices as they are priced in US dollar.

 

Update from the Middle East

 

Libya

The recent reports from Libya state that NATO continues to bomb Libya’s capital – Tripoli; also the rebels have managed to take control of the west coast road of city of Misrata where Gaddafi’s forces controlled in the past couple of months. There are reports of over 750,000 people who fled Libya since Gaddafi’s forces started their attack on the protestors back in February 2011.

During March, the total OPEC production fell by 626.7 thousands bbl/d compared to February 2011. Out of which the Libyan oil production declined by nearly a million bbl/d. The drop in oil production of OPEC might explain part of the rise in crude oil prices during March and April 2011.

 

Syria

The situation in Syria keeps on escalating as Syrian armed forces renewed the assault on protestors against the current regime led by President – Bashar al-Assad.

Yemen

The turmoil in Yemen didn’t end yet and there are still reports of conflicts between the police and military forces and protestors. Yesterday there are reports of six people were killed on Monday in Taiz.

Yemen produced in 2009 286.5 thousand of barrels per day and over half of it Yemen consumes, but the main importance of Yemen in the oil market is related to its proximity to Bab al Mandab strait – one of the most important strait in the world; it connects the Red sea to the Golf of Aden. This strait is pivotal for transport of commodities including oil. Therefore, unrest and instability in that region that could jeopardize the transport of major commodities or even impede them might have an effect on their prices.

Current crude oil prices

Major crude oil prices are currently traded with moderate rises in the US markets:

The Nymex crude oil price, short term futures (June 2011 delivery) is traded at 102.85USD / barrel, a rise of 0.3USD/b or 0.29%, as of 17.00*.

The Dated Brent spot oil price inclines by 0.94$/b and it is at 116.63USD / barrel as of 17.11*.

(* GMT)

Thus, the current premium of Brent over WTI is at 13.78$/b.

Crude Oil price outlook and analysis:

 

Following the rises of crude oil prices the roller coaster the commodities markets are at is probably stem by the high uncertainty related not only to the turmoil in the Middle East, but also to the speculation in the financial markets in regards to the economic condition of US and Europe. The fluctuations in the EURO/USD exchange rate are probably affecting the commodities prices including crude oil prices.

 

As we are exiting the cold weather in the US and Europe, the consumption of heating oil is likely to decline. This might also affect the drop in future and spot prices in the upcoming weeks to come.

 

I still speculate that crude oil prices will remain near the 100$ mark; however in the mid term will start to come down, as the uncertainty around the supply of oil from the Middle East (mainly in Libya) will dissipate.

Here is a reminder of the top events and reports that are planed for today and tomorrow (all times GMT):

Today

Chinese Trade Balance report

3.00 – Chinese CPI

 

Tomorrow

 

13.30 –Canadian Trade balance

13.30 – Report on American Trade balance

15.30 – EIA report about Crude oil inventories

 

[ratings]

 

For further reading:

• Weekly outlook for May 9-13
• Oil prices fell sharply last week – Weekly recap 2-6 May
• Petroleum and oil stocks in the US continued to rise – May 5