Oil price (WTI) slipped again last week, while Brent oil
rallied: WTI inched down by 0.80%; Brent oil sharply rose by 3.26%. As a
result, the gap of Brent oil over WTI expanded: The premium ranged
between $11.26 and $14.78 – the highest range since April 2013. Last
week, the EIA’s weekly report showed a drop in oil’s stockpiles by 5.9
million barrels and the oil market tightened. The OPEC report showed no
change in the OPEC production, but the frictions in Libya and the
tension between Israel and Iran may have contributed to the rally of
Brent oil. Will oil rally next week? This week,
several reports may affect oil prices. These items include: U.S retail
sales, EU and China’s manufacturing PMI, Philly fed index, and EIA oil
weekly report.
Here is a weekly outlook and analysis for the oil market for November 18th to November 22nd:
Oil Prices – November Overview
During last week, crude oil price (WTI) slipped by 0.80% and reached
by Friday $93.84/b; conversely, Brent oil sharply rose by 3.26% to
$108.55/b;
In the chart below are the daily changes in WTI and Brent oil prices
during the past several months (prices are normalized to January 31
st). As seen below, Brent oil price rallied in the past couple of weeks.
Premium of Brent over WTI – November
The gap between Brent and WTI oil
widened last week as it ranged between $11.26 and $14.78 per barrel. During the week, the premium increased by $4.19 per barrel.
Oil Stockpiles, Demand and Supply
The oil stockpiles slipped by 5.9 MB and reached 1,806.9 million
barrels. The linear correlation between the changes in stockpiles has
remained stable at -0.198: this correlation implies that oil price,
assuming all things equal, may rally next week. But in order to better
understand the fundamentals let’s analyze the developments in supply and
demand:
Supply: Oil imports slipped again by 0.5% last week. Conversely, oil production sharply rose by 1.8%; the total supply rose by 0.6%;
Demand: Refinery
inputs rose again by 0.9% last week. In total the demand remained lower
than the supply; the gap between supply and demand is still positive but
the difference has slightly narrowed – this may eventually slightly
pull up oil prices as the oil market in the U.S tightens.
The chart below shows the changes in the gap between supply and
demand (below zero: Demand is above Supply; above zero: Supply is above
Demand).
As
seen above, the currently loose oil market in the U.S coincides with
the drop of oil price. But if U.S oil market continues to tighten, as it
did during the previous week, this could eventually lead to a rise in
oil price.
The next weekly report will be released on Wednesday, November 20
th and will refer to the week ending on November 15
th.
OPEC Monthly Report
According to the recent OPEC Report, OPEC’s oil production remained
nearly flat at 29,894 thousand in October – nearly unchanged from the
preceding month. This news suggests the oil supply hasn’t changed
despite the tensions in Libya.
IEA Monthly Report
According to the recent
monthly update,
the global oil supply rose in October by 640 thousand bbl/d to reach
91.8 million bbl/d mainly due to rise in non-OPEC countries’ liquids.
The estimate on global demand was slightly raised in 2013 due to
stronger than expected oil demand in Europe during Q3. For 2014 the
projection are for a 1.1 mb/d
gain.
The rise in expected demand for oil in 2014 may have pulled up the
price of oil. Global refinery runs for Q4 have been cut by 0.6 mb/d due
to reduced European throughputs. These data provide a mixed signal
regarding the progress of the oil market.
Middle East and Oil – update
The
riots
in Libya between rival militias in the outskirts of Tripoli have raised
the uncertainty in the region and could eventually further reduce
Libya’s oil production, which is currently one third of its normal
output. But since Libya’s output currently accounts for only 1.3% of
OPEC’s total output, it is likely to have little adverse effect on the
oil market. The
tensions
between Israel and Iran over Iran’s nuclear program continue. The U.S
continues to ease the situation but with little success. These tensions
could also have some small effect on oil prices. But only if there were
to be an escalation in the situation, this could have a significant
effect on oil prices.
Oil Related News for the Week
Here are several news items that could influence oil investors:
Wednesday –U.S. Retail Sales Report:
This monthly report refers to October; in the previous report regarding
September, retail sales inched down by 0.1% (month-over-month); core
retail sales rose by 0.4%; this report could signal the developments in
U.S’s gasoline demand and thus may affect U.S oil;
Thursday – Flash Chinese German, French and Euro Zone Manufacturing PMI:
In the last monthly report regarding October 2013, the Germany’s PMI
inched up to 51.5 i.e. the manufacturing conditions are growing but at a
slightly faster pace. France’s PMI inched down to 49.4. This report
serves signals to the developments in the Euro Area’s manufacturing
conditions; this news, in turn, may affect the Euro/USD currency pair
and consequently commodities prices;
Thursday – Philly Fed Manufacturing Index:
This monthly survey estimates the growth of the US manufacturing
sectors. In the last survey regarding October, the growth rate fell from
+22.3 in September to +19.8 in October. If the index continues to fall,
it may adversely affect not only U.S Dollar but also U.S equity markets
and commodities (
the recent Philly Fed review);
Oil Outlook and Breakdown
From the supply side, the ongoing drop in imports continued to
partly offset the rise in oil production. From the demand side, refinery
inputs rose again. In total, the gap between supply and demand has
diminished due to the drop in imports; this could suggest the oil market
has tightened. In any case, the gap is still high and the demand
remains lower than the supply. Looking forward, the upcoming European,
American and Chinese reports could offer some additional insight
regarding the growth of these economies. The gap between Brent and WTI
picked up to the $11-$14 range. This recent rise might be due to
stronger than expected demand for oil in Europe, which suggests the oil
market in Europe is tighter than estimated. The fundamentals suggest oil
prices may rise in the coming weeks especially if the upcoming reports
show growth and exceed expectations and if the oil market further
tighten. Moreover, if the USD continues to fall, this could also pull up
the price of oil.
The bottom line, on a weekly scale, I guess oil price (WTI) may slightly rise.
