During November, the price of oil has increased by 2.4%. United States Oil (USO) also rose by 1.7%. The recent rally in the price of oil may have been stemmed, in part, by the recent tensions in the Middle East. The rise in oil prices may have also had a positive impact on energy companies' stock, such as Exxon Mobil Corporation (XOM). Will oil prices continue to rise? Let's examine the recent developments in the oil market and try to figure what's next for crude oil.
The recent conflict in the Middle East between Israel and Hamas may have had some effect on the oil market as it could have a contributed to the high volatility in the oil market. Nonetheless, this conflict didn't appear to have a direct or indirect effect on the oil market, as none of these places have oil and the possibility of this conflict escalating to a regional war wasn't very likely. Now that the conflict has ended (for now) let's check the fundamentals.
According to the recent EIA report, the U.S. oil stockpiles declined again by 1.5 million barrels and reached 1,069.4 million barrels. There is a negative correlation between the changes in oil stockpiles (lagged by one week) and the price of oil. This correlation suggests, assuming all things equal, the recent fall in stockpiles may positively affect this week's oil prices. The current oil stockpiles are higher than they were last year by roughly 42.6 million barrels. The chart below presents the changes of oil stockpiles and oil price during recent years.
According to the IEA monthly update, OECD inventories increased during September and are expected to increase during October as well. The rise in inventories may have also contributed to loosening the oil market in OECD countries.
During the previous week, the U.S oil production increased again by 0.4% (week-over-week) and was also higher than the production level in the preceding year by 14.2%; Refinery inputs edged up by 0.1%. Imports, on the other hand, declined by 3.2% compared to last week. This means the oil supply continues to rise even if at a slower pace than in recent weeks. One of the reasons for the fall in imports, according to the recent EIA report, is Hurricane Sandy that have cased an impediment in shipment of petroleum to the Northeast region.
According to the recent OPEC monthly report, OPEC's oil production remained nearly unchanged and stable. This stability in production was despite the tensions between Iran and the U.S. As of October, OPEC's oil production reached nearly 31 million bbl per day.
In recent weeks several reports came out that could suggest a mixed trend in regards to the progress of the U.S economy including: the Philly Fed manufacturing index plunged, partly due to the adverse effect of Hurricane Sandy; manufacturing PMI edged up and is still well above the 50 point mark; U.S retail sales changed direction and declined during last month. There are also ongoing concerns regarding the progress of the U.S economy: most notably the budget talks in the U.S Congress that are likely to continue in the weeks to follow.
Europe continues to show little to no progress: the recent EU Summits didn't result in any actual decisions about the future steps of the Greek bailout. Further, the EU economy doesn't show much signs of progress and thus may impede the growth for oil in this region.
China, the second largest consumer of oil, has recently showed some signs of growth as its manufacturing PMI (flash report) rose in November to 50.4 - a 13 month high. This figure means the manufacturing sectors in China are expanding again. This report could imply an expected growth in demand for oil in the near future, assuming this trend will continue.
On a global scale, the recent IEA report revised down its projection for global demand for oil in the fourth quarter of 2012 due to the weak EU economy and the adverse effects of Hurricane Sandy on the demand for oil in the U.S.
Therefore, the demand for oil in the U.S and other leading counties might decline (except, perhaps in China); the supply in the U.S has increased while the OPEC oil production remained flat. This analysis suggests the oil market has slightly loosened.
What's the bottom line?
The recent rise in the price of oil may have been a short term event due to the recent conflict in the Middle East and the recent fall in the oil stockpiles in the U.S. Nevertheless, the oil market in the U.S seems to have loosened a bit. Moreover, the rise in OECD's oil supply, OPEC stable oil production, and the expected drop in global demand during the last quarter of the year could suggest the price of oil will resume its downward trend in the weeks to follow. My guess is that the price of oil will trade down back to the low 80s in the weeks to follow.
For further reading see "Will Exxon Continue To Trade Up?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.