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Guest Commentary: Oil Prices Moderately Inclines

Guest Commentary: Oil Prices Moderately Inclines

2011-05-10 17:00:00
Lior Cohen, Energy Analyst for Trading NRG,

Oil Prices Moderately Inclines Today - Oil Outlook 10 May

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

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

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 9th, WTI oil decreased by 9.6%;

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

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

Guest_Commentary_Oil_Prices_Moderately_Inclines_body_Difference_between_Brent_and_WTI_crude_oil_price_2011_10_May.png, Guest Commentary: Oil Prices Moderately Inclines

Despite the rapid fluctuations in oil prices, the premium of Brent over WTI 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.

Guest_Commentary_Oil_Prices_Moderately_Inclines_body_Correlations_wti_and_Brent_crude_spot_oil_prices__Dec_2010-_May_10_2011.png, Guest Commentary: Oil Prices Moderately Inclines

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 futures by 23.8%; this new situation will come into play by the end of the business day (May 10th).

This decision came in attempt by CME to curb the "speculative money" to further affect very rapidly the 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 EURO//USD with oil prices including WTI and Brent.

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 oil prices.

Guest_Commentary_Oil_Prices_Moderately_Inclines_body_Correlations_wti_and_Brent_spot_oil_prices_with_EUR_USD__Dec_2010-_MAY_10_2011.png, Guest Commentary: Oil Prices Moderately Inclines

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

(From the Euro side)

(From the US dollar)

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

Oil Price Outlook and Analysis:

Following the rises of 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.

The reasons for the uncertainty relate to the debit crisis in Greece, Ireland and Portugal (for Europe) and the future steps that the Fed might consider as the Quantitative easing plan will end in June (for US).

I still speculate that 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):


Chinese Trade Balance report

3.00 – Chinese CPI


13.30 –Canadian Trade balance

13.30 – Report on American Trade balance

15.30 – EIA report about Crude oil inventories

By: Lior Cohen, Energy Analyst for Trading NRG

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