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Guest Commentary: Oil Prices Weekly Outlook January 2-6

Guest Commentary: Oil Prices Weekly Outlook January 2-6

2012-01-03 13:32:00
Lior Cohen, Energy Analyst for Trading NRG,
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Oil prices slightly declined during the last week of 2011, but this week we are entering a new year and the direction of oil prices may change. For the first week of 2012, let's examine what is up ahead for the oil market.

On Friday, December 30th oil price (WTI) slightly fell by 0.82% to $98.83/b; Brent also declined by 0.69% to $107.58/b; during December WTI decreased by 1.52% and Brent by 3.36%.

The chart below presents the development of WTI and Brent during the month (prices are normalized to November 30th). It shows the decline and rise of both oil prices during the month.

Guest_Commentary_Oil_Prices_Weekly_Outlook_January_2-6_body_Crude_January_2.png, Guest Commentary: Oil Prices Weekly Outlook January 2-6

The premium of Brent over WTI continued to decline during most of last week and reached on Friday to $8.75. Furthermore, during December the premium sharply decreased by 20.16%.

Guest_Commentary_Oil_Prices_Weekly_Outlook_January_2-6_body_Difference__January_2.png, Guest Commentary: Oil Prices Weekly Outlook January 2-6

Main Oil Related News Items

U.S. ISM Manufacturing PMI: This report will present the monthly change in manufacturing sector on a national level for December 2011. During November the index sharply rose to 52.7% a 1.9 percent point increase compared to October's index; this index might affect crude oil markets (see here my review of last report);

U.S. Factory Orders: This monthly report will examine the changes in U.S. factory orders of manufactured durable goods during November. This report may indirectly signal the changes in U.S. demand for commodities such as crude oil. According to the recent flash report, during November new orders of manufactured durable goods increased by $7.5 billion or 3.8% to $207.0 billion (for the full report);

U.S. Non-farm Employment Report: in the December report regarding November, the labor market continues to rally as the number of non-farm payroll employment rose by 120k; the U.S unemployment rate slipped to 8.6%. This report could affect commodities (see my last review on the U.S labor report).

Oil Stockpiles – Slightly Rose Last Week

U.S. oil stockpiles changed direction and rose during last week by 3.1 million barrels and reached 1,736.86 million barrels. The current oil stockpiles are below the quota from last year: the current oil stockpiles are 59.671 million barrels below oil stockpiles levels recorded during the same week in 2010. The next crude oil stockpiles report will be published on Thursday, January 5th.

Forex and Oil– December

The EURO/USD continued its downward tend during last week of 2011 and declined by 0.64%, while AUD/USD fell by 0.56%; the strong relation between oil prices and AUD/ USD might have be among the factors to pull down oil prices. If the USD will further strengthen against the Euro and AUD during the upcoming week, it may affect crude oil to trade down.

U.S. Stock / Oil– December

The S&P500 slightly declined during the last week of 2011 by 0.61% to reach 1,257 on Friday; during 2011 there were strong positive correlations between oil prices and S&P500 (e.g. during December the correlation with WTI was 0.611 and with Brent 0.619). The chart below presents the changes in the linear correlations between oil prices and S&P500 during recent months.

If the American stock market indexes will rally during the week and recover from the falls during the last week of December, this may also push up oil prices.

Guest_Commentary_Oil_Prices_Weekly_Outlook_January_2-6_body_Correlations_2_2011.png, Guest Commentary: Oil Prices Weekly Outlook January 2-6

Oil Prices Forecast:

Oil prices made a comeback during the second part of December, after they had declined during the first couple of weeks of December.

In the first week of the year there are many news items that could affect the financial markets and consequently also the crude oil market; if the U.S. reports will be positive including the U.S. non-farm labor report, they might positively affect the American stock market and along with it the crude oil market. There might also be a "January effect", which could push up not only American stock markets, but also oil. On the other hand, if the major exchange rates such as AUD and CAD will depreciate against the U.S. dollar, they may curb the rally of oil.

I speculate that during the first week of 2012, WTI will revolve around $97-$105 mark and Brent around $106-$113.

For further reading:

Gold and Silver Prices Weekly Outlook for January 2-6

Weekly Outlook for 2-6 January

By: Lior Cohen, Energy Analyst forTrading NRG

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