During last week, the price of oil declined by 3.4%. United States Oil (USO) also fell by 3.2%. The fall in oil prices may have curbed the recent rally of energy companies' stock such as Exxon Mobil Corporation (XOM). Will oil prices continue to fall? Let's examine the recent changes in the oil market and try to figure what's up ahead for crude oil.
According to the recent EIA weekly update, the U.S. oil stockpiles declined again by 2.3 million barrels and reached 1,066.7 million barrels. The changes in oil stockpiles (lagged by one week) tend to be negatively correlated with the price of oil. This correlation suggests, assuming all things being equal, the recent drop in stockpiles may positively affect this week's oil prices. The current oil stockpiles are still higher than they were last year by roughly 34.6 million barrels. The chart below presents the developments of oil stockpiles and oil price during recent years.
During last week, U.S oil production rose again by 0.5% (week-over- week) and was also higher than the production level in the preceding year by 15.1%. Refinery inputs sharply rose by 1.3%. Imports also increased by 0.7% compared to the previous week. This means the oil supply continues to grow at a slightly faster pace than in recent weeks. Moreover, the EIA projects oil production mainly from tight oil play will further rise in the months to follow.
According to the latest OPEC monthly report, OPEC's oil production remained virtually unchanged. This stability in production was despite the ongoing tensions between Iran and the U.S and the sanctions enforced on Iran. As of November, OPEC's oil production reached almost 31 million bbl per day. Tomorrow, OPEC ministers will convene for OPEC's Summit. If OPEC decides to change its current production quota, this could lower the supply and thus pressure up oil prices. My guess, however, is that OPEC won't change its quota.
In recent weeks several reports were published that could suggest a mixed trend in regards to the growth of the U.S economy including: manufacturing PMI declined to below the 50 point mark, which means the manufacturing sectors in the U.S are contracting and employment rose again, according to the recent non-farm payroll report, during last month. The progress of the U.S economy is still unclear, mainly in light of the fiscal cliff that is daunting on the future growth of the U.S economy. With respect to the uncertainty around the fiscal cliff, if the FOMC intervenes again the U.S financial markets by augmenting its current stimulus, this could pull down the USD and consequently pressure up commodities prices.
According to the recent EIA report, the demand for gasoline is expected to fall in 2013.
Europe continues to show little growth and thus may impede growth for the demand for oil in this region.
China, the second largest consumer of oil, has recently showed little signs of progress as China's exports rose by a lower pace than many had expected. This report could imply a lower growth in demand for oil in the near future, assuming this trend continues.
Therefore, the demand for oil in the U.S and other leading countries might decline; the supply in the U.S has risen while OPEC oil production remained flat. This analysis suggests the oil market has slightly loosened.
What's Next for Oil?
The recent fall in the price of oil might continue in the weeks to follow because: the current U.S oil stockpiles are still well above last year's stockpiles; the oil market in the U.S seems to have loosened a bit; OPEC's oil production remains stable; global demand for oil, mainly in Europe, is expected to drop in the months to follow. Therefore, my guess is that the price of oil will decline to the low 80s in the weeks to come.
For further reading see "Will Oil Continue Its Tumble?"