Will Oil Break the $100 Mark?
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Oil bounced back from last month's tumble. During July, the price of WTI oil rose by 7.6%; United States Oil (NYSEMKT:USO) rose by 7.4%. The recent decline in the Euro/USD may have curbed the rise in oil prices. The fundamentals didn't change much so there shouldn't have been such a sharp movement in oil prices; nonetheless, during recent months the volatility of both WTI and Brent oil hiked. Will the recent rally in oil price hold up? Will oil prices reach the $100 mark in the near future?
The recent rally in oil prices has also affected many oil companies such as Chevron Corporation (NYSE: CVX) and ExxonMobil Corporation (NYSE: XOM).
The chart below presents the price of WTI and Exxon’s stock during 2012. As seen, oil and Exxon’s stock have had an upward trend in recent weeks.
During July the linear correlation between Chevron and oil (daily percent changes) was 0.63, and between Exxon and oil it was 0.56. These are mid-strong correlations. The rally in oil prices may have contributed to the recovery of these energy prices. Since these energy companies are strongly correlated with the S&P500 index (during June-July the linear correlations were 0.75 and 0.76, respectively). Alliteratively, the stagnation of the S&P500 may have curbed these energy companies’ rise.
In the chart below is the development of standard deviations of WTI and Brent oil (daily percent changes) during recent months. It shows the rise in oil prices' volatility during June and July compared with previous months'.
Demand
During recent weeks many financial reports were published; they referred to the manufacturing conditions of the major economies: China’s manufacturing PMI index edged up to 49.5; the Philly fed manufacturing index also rose but remained negative; Euro Zone and German manufacturing PMI declined. The reports from China and the U.S point out that the manufacturing conditions continue to contract but at a slower pace. This might suggest a change in trend.
Driving season: this entails a seasonal effect in which the demand for gasoline tends to rise. On the other hand, the EIA projects the demand for gasoline will reach an 11 year low this summer. These data point out to a mixed signal as to the near future progress of the demand for oil.
Supply
From the Supply side, U.S. oil production declined by 0.43% (week over week) but was 11.5% above the production level in 2011. Imports and refinery inputs also declined. This means the U.S. supply didn't progress.
In OPEC, oil production slightly declined during last month: its oil production fell to 31,363 bbl/d compared with 31,469 bbl/d a month back. Libya, Nigeria, and Iraqs’ oil production slightly rose, while Iran’s production declined below the 3,000 mark. It doesn’t seem there are causes for concerns over Iran’s oil production, but if the tensions between Iran and the U.S will intensify, it could lead to an escalation in the Middle East which, in turn, may lead to a drop in oil production.
Storage
U.S. Petroleum and oil stockpiles increased by 1.4 million barrels; it reached 1,798.4 million barrels. The current oil stockpiles are 1.8 million barrels below the levels during the parallel week a year back.
OECD inventories rose by 15.4 million barrels during May; they reached 2,672 million bbl. The oil stockpiles are still below the 5-year average.
The bottom line is that oil storage is slightly below last year’s but not by much.
The Euro/USD and Oil Prices
During last week the EURO/USD declined by 0.74% and during the month by 4%. There are positive correlations between the Euro/USD and oil prices: during June-July, the linear correlation between EURO/USD and oil reached 0.84. Therefore, if the USD will continue to appreciate against the Euro this may adversely affect oil prices.
There are several factors that could lead oil prices rising to the high 90s especially if the oil market will tighten due to supply constraints. But I speculate this won't be the case. Don't get me wrong, if the tensions between Iran and Israel and between Iran and the U.S. take a turn for the worst it could pressure up oil prices to the $100 mark very promptly. But unless something will actually occur, my guess is that the decline in demand and the strong USD will prevail so that the oil market will loosen and oil prices will come down to the low 80s.
This analysis on oil prices was first published on Trading NRG
For further reading:
Big Swings for Oil; where will Oil Price Land?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
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