08 11

Oil prices resume rally

oil prices resume rally

The price of oil changed direction and after it had risen during the first three weeks of July, oil price declined during last week. In July, WTI oil price (August delivery) and by extension United States Oil (NYSEARCA:USO) rose 6.1% and 5.8% respectively. Let's examine the recent changes in the oil market that could explain the recent decline in oil price and perhaps what is up ahead for it.

During July, the rise in oil prices has had a slight positive effect on energy companies' stock such as Exxon Mobil Corporation (NYSE:XOM). During July the price of the Exxon rose by 2.2%.

Stockpiles

U.S. oil stockpiles rose by 2.7 million barrels to 1,076.05 million barrels; the current oil stockpiles are 2.2 million barrels below oil stockpiles of the parallel week in 2011. The current price is nearly .7 below the price of the parallel week in 2011; if the oil market will tighten, oil price could resume its upward trend. The linear correlation between the lagged by two weeks percent change in oil storage and current WTI oil price is at -0.285. Nonetheless, the rise in oil stockpiles coincided with the rally of oil rates. As see below, during recent weeks there has been a rise in both oil stockpiles and weekly oil price.

Supply

During last week the U.S oil production rose by 0.4% compared to the previous week and was higher than the production level in 2011. Imports also increased by 1.5%; the refinery inputs edged up compared to last week by 0.2%. This means the supply slightly expanded and could explain the growth in the oil storage.

There are still concerns that the tensions between Iran and U.S will lower OPEC's oil production. For now these concerns haven't been substantiated.

Demand

There are also concerns for the economic progress of the leading oil consumers: the U.S GDP expanded by only 1.5%; the Philly Fed index slightly rose but was still negative; this week there are several additional reports that could offer insight as the progress of the leading economies including: the American and Chinese manufacturing PMI, U.S non-farm payroll report. If these reports will continue to show little progress in China and U.S this could suggest the demand for oil will only slightly grow. There are still speculations that EU and U.S may issue stimulus plans. The FOMC will issue tomorrow a statement; ECB will announce its interest rate on Thursday. I suspect the Fed won't announce QE3 in the upcoming statement. In such a case, it could adversely affect oil prices.

This means the demand for oil might decline, while the supply slightly rose, i.e. the oil market is loosening up a bit.

Currencies and Oil

The effect currencies have on the movement of oil prices is also a factor to consider: the EURO/USD decreased during July by 3.2%. On the other hand, the AUD/USD rose by 2.6%. During July the linear correlation between EURO/USD and oil price was 0.54, which was higher a week earlier; thus, if not for the decline in the Euro/USD, oil price might have increased by a higher rate than it actually did. Further, if the Euro and other "risk currencies" will depreciate against the USD, they could hold back oil prices from rising.

The result of this analysis is that the oil market is loosening up but there are some news and events that could push oil prices up again. Assuming there won't be big headlines coming from the FOMC or ECB and there won't be any escalation in the relation between Iran and the U.S. I guess oil prices will remain at last week's price range; perhaps the seasonal effect might push oil prices to edge up during the week. Finally, the depreciation of the Euro might have adversely affected oil prices; if the Euro will continue to fall; this could keep oil from trading up.

For further reading: Big Swings for Oil; where will Oil Price Land?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

- prices RTE.ie weak rally amid Oil resume dollar

WTI and Brent sank more than 2.5 percent in intraday trading on Monday, after a report at the end of last week showed another solid build in the U.S. rig count, the tenth consecutive week that the oil industry added rigs back into the field. Aside from a single week in October, the U.S. oil industry has deployed more rigs in every week dating back to June, a remarkable run that has resulted in more than 200 fresh rigs drilling for oil. The gains in the rig count come even as oil prices have held steady in the mid- to low-$50s per barrel.

At the start of 2017, there are two major dynamics at play occurring at the same time, each pushing in opposite directions on the market. The OPEC deal is slated to take oil off the market, while U.S. drilling is expected to add new supply. The pace and magnitude of each trend will ultimately drive oil prices one way or the other.

On the positive side of the ledger, there are early signs that OPEC members are meeting their commitments.

That bodes well for a narrowing supply surplus – and ultimately a deficit – as well as falling inventories. In other words, OPEC is succeeding in putting upward pressure on prices.

However, the flip side of the equation is faster drilling from the U.S., where rig counts continue to climb. Oil output, according to EIA weekly surveys, is up roughly 300,000 bpd from summer lows, with more supply expected to come online in the months ahead as drilling picks up pace.

It is unclear, at this point, how rising U.S. supply and falling OPEC output will ultimately balance out. For now, the consensus seems to be tightening conditions in the first half of 2017, with much greater uncertainty in the second half, but that remains to be seen.

What is clear is that oil speculators have built up such a large bullish bet on oil that they have opened up crude to near-term downside risk. According to Reuters, hedge funds and other money managers amassed net-long positions in WTI and Brent equivalent to 796 million barrels in the last week of December, which was nearly double the amount from mid-November.

That suggests two things, both of which are bearish for oil: there is not a lot of money left to go long, lowering the chances of further prices gains; and the potential for a correction in prices is very high at this point. Indeed, in the most recent week for which data is available, net-long positions declined a bit, raising the possibility that bullish bets have peaked. All it will take is a bit of bearish news to spark a downturn in prices.

Read more on Oilprice.com: Will Natural Gas Go On Another Run In 2017?

There are a few minor worrying signs for oil prices that could crop up as additional bearish forces in the next few weeks. The U.S. DOE announced on January 9 a “notice of sale” from its strategic petroleum reserve, with plans to sell 8 million barrels for delivery over the course of February, March and April. Meanwhile, Libya is seeing rapid gains in oil exports after the reopening of a key export terminal, with output jumping to 700,000 bpd, according to the latest data, up sharply from the 580,000 it produced in November and the 300,000 bpd it exported before it started restoring output last summer.

In fact, production appears to have declined in December, falling 200,000 bpd to 1.45 mb/d, because of some of these issues. But if those problems can be overcome, Nigeria has latent production capacity that could come back online at some point.

And in a sign that there is not a lot of room on the upside, a kerfuffle in the Persian Gulf over the weekend did nothing to affect oil prices. A U.S. Navy destroyer fired three warning shots towards Iranian ships, an incident that in the past would have led to a sharp, even if brief, rally in crude prices. Instead, the markets shrugged off the incident – WTI and Brent sank on the first trading day after the event, on unrelated news. "The market is overbought and under a lot of downward pressure," Bob Yawger, director of the futures division at Mizuho Securities USA Inc., told Bloomberg. "The shots fired at the Iranian boats in the Strait of Hormuz didn’t do anything to the market. A few years ago that would have added a couple dollars to the price.

During July, the rise in oil prices has had a slight positive effect on energy companies' stock such as Exxon Mobil Corporation (NYSE:XOM). During July the price of the Exxon rose by 2.2%.

Stockpiles

U.S. oil stockpiles rose by 2.7 million barrels to 1,076.05 million barrels; the current oil stockpiles are 2.2 million barrels below oil stockpiles of the parallel week in 2011. The current price is nearly $7.7 below the price of the parallel week in 2011; if the oil market will tighten, oil price could resume its upward trend.

Supply

During last week the U.S oil production rose by 0.4% compared to the previous week and was higher than the production level in 2011. Imports also increased by 1.5%; the refinery inputs edged up compared to last week by 0.2%. This means the supply slightly expanded and could explain the growth in the oil storage.

There are still concerns that the tensions between Iran and U.S will lower OPEC's oil production. For now these concerns haven't been substantiated.

Comments

  1. Vidocuruno

    Flickr image of the week: West Texas Intermediate prices dollars per barrel.

  2. Cufahehe

    OPEC or Not, Crude Oil Prices Will Go “Here”

  3. Radukoha

    Hurry up merge so we can see policy about cutting all our taxes while improving services, infrastructure stuff about oil prices

  4. Famaxiqiwaf

    USD/CAD Drops Lower As Oil Prices Extend Gains

  5. Deyebapo

    I"ve never understood why Putin wants chaos in the west. chaos>recession>reduced oil demand>lower oil prices>lower oil income for Russia

  6. Jekurofojiy

    U.S. energy companies add oil rigs for 18th wk in a row, 2nd-longest such streak on record, expectations of higher crude prices

  7. Coquvemekowoq

    The markets frustrate OPEC’s efforts to push up oil prices

  8. Joyasonotoliq

    USD/CAD Drops Lower As Oil Prices Extend Gains

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>