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Guest Commentary: Oil Prices Daily Outlook 05.24.2011

Guest Commentary: Oil Prices Daily Outlook 05.24.2011

2011-05-24 14:53:00
Lior Cohen, Energy Analyst for Trading NRG,
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Oil Prices Daily Outlook 24 May

Oil prices started off the week with falls, as the speculation around the supply and demand side is high.

Let's examine the recent news related to oil trading for today, May 24th:

Oil Prices – May

Yesterday, May 23rd, the WTI crude oil prices declined very sharply by 2.25%; During May, up to yesterday, WTI decreased by 14.2%.

Brent price also declined by 2.41%; during May Brent oil declined by 13.1%.

The chart below of the normalized WTI and Brent during May 2011 shows that these energy commodities fell sharply at the beginning of May, and since then they fluctuated within the 6 to 7 percent range.

Guest_Commentary_Oil_Prices_Daily_Outlook_05.24.2011_body_Crude_spot_oil_prices_2011_Brent_oil_and_WTI_spot_oil__2011_May_24.png, Guest Commentary: Oil Prices Daily Outlook 05.24.2011

The gap between Brent over WTI reached on Monday, May 23rd 12.81$/b. Despite the moderate changes in this premium in the recent few days, during May, the premium shifted and fluctuated very rapidly and ranged between 12 and 17.8$.

Guest_Commentary_Oil_Prices_Daily_Outlook_05.24.2011_body_Difference_between_Brent_and_WTI_crude_spot_oil_price_2011_May_24.png, Guest Commentary: Oil Prices Daily Outlook 05.24.2011

Major Currencies and Oil Prices during May

During May, up to date, the strongest correlation between oil and major currencies is still between Euro / US dollar and WTI prices, and USD/ CAD and WTI prices, as seen in the chart below.

Guest_Commentary_Oil_Prices_Daily_Outlook_05.24.2011_body_Correlations_wti_and_Brent_spot_oil_prices_with_MAJOR_CURRENCIES_MAY_24_2011.png, Guest Commentary: Oil Prices Daily Outlook 05.24.2011

Yesterday, these major currencies fell very sharply, as the US dollar gained on them: the Euro / US dollar fell sharply by 0.8% and reached 1.4048; USD/ CAD rose by 0.38%; and AUD/USD fell very sharply by 1.45%.

These changes coincide with the falls of oil yesterday and their linear correlation during May as seen in the chart above.

During May, Euro / US dollar fell by 5.13%, the AUD/USD declined by 4.25% and the USD/CAD rose by 3.5%.

These falls in EURO/USD are probably related to the concerns over the European debt crisis and the AUD/USD falls is probably related to the uncertainty around the future growth rate of China's economy and demand for oil from Australia.

Goldman Sachs and Morgan Stanly Raise Their Oil Price Forecast

Despite the falls in oil at the beginning of May, Bloomberg reports that Goldman Sachs and Morgan Stanly have raised their forecasts on oil; one of the reasons they think oil will incline comes from the supply side, in particular the drop in oil production of OPEC mainly due to Libya.

Morgan Stanley raised it projections on the average Brent oil price by 20% to $120 a barrel for 2011; Goldman Sachs raised its annual oil price estimate for the European benchmark contract to $130 a barrel and recommended investors to go long on Brent oil for December 2012 contracts.

Upcoming OPEC Meeting on June 8th

The speculation around the upcoming OPEC meeting on June 8th, in Vienna Austria continues to be high; the main question is whether OPEC will decide to raise its reported oil production or not. Since Libya's civil war started back in February, Libya's oil production fell from 1.6 million bbl/d back in January 2011 to an estimated oil production of only of 0.24 million bbl/d in April 2011.

According to the recent OPEC report regarding April 2011, the total OPEC oil production reached 28.985 million bbl/d nearly the same level as in March, but it's nearly 3.2% below the oil production level as in February 2011.

The report also shows that the world oil supply is expected to rise by 1.63% in 2011, compared to 2010- mainly due to rising demand in China, which is expected to incline by 6.29%.

This is why it's imperative for OPEC to raise its oil production in the months to come; otherwise, it might further tighten the oil market – mainly in Europe and Asia, and consequentially further pressure oil prices up.

World News – Oil Markets

Europe

The debt crisis in Europe continues: according to Bloomberg, the Greek 10-year government bonds declined very sharply on May 20th and thus the speculation around Greece's capability in returning its debt is high.

There are also speculations around Europe's manufacturing growth rate as it is expected to slow down in May. This might suggest that Europe's demand for oil for manufacturing purposes is falling.

Middle East

For the recent news about Middle East see here.

Oil Price Outlook:

Oil prices declined yesterday, but are currently traded up; this zigzag in oil prices' direction shows that the market keeps on staying put at the current prices' level.

The speculation around the future the supply and demand is still high:

Demand- the future demand of major countries' oil consumption including U.S., Europe, Japan and China;

Supply - OPEC's future oil production isn't clear yet, and if OPEC will decide not to raise its output target, this might further push oil prices.

I still speculate that in the short term all these concerns will continue to pull oil prices in different directions and eventually keep oil prices at their current high prices.

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

Today

23.50 – Report of Japanese Trade balance (for April)

Tomorrow

Tentative – Publishing the US Treasury Currency Report by the Department of Treasury

13.30 – US Department of Commerce – Report on Durable Goods

15.30 – EIA report about Crude oil inventories

For further reading:Weekly outlook for May 23-27

By: Lior Cohen, Energy Analyst for Trading NRG

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