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During last week, the price of oil increased by 2.5%. United States Oil (NYSEARCA:USO) also rose by 2.1%. Due to the recent rally of oil, it may have contributed to the recent rise of energy companies' stock such as Exxon Mobil Corporation (NYSE:XOM). Will oil prices continue their recent rally? Let's examine the recent developments in the oil market and try to figure what's next for oil.

Stockpiles

According to the recent EIA weekly update, the U.S. oil stockpiles declined by 11 million barrels and reached 1,054.9 million barrels. The shifts in oil stockpiles (lagged by one week) tend to be negatively correlated with 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 remained higher than they were last year by roughly 29.2 million barrels. The chart below shows the developments of oil stockpiles and oil price during recent years.

(click to enlarge)

Supply

During the previous week, the U.S oil production edged up again by 0.6% (week-over- week) and was also higher than the production level in the preceding year by 18.2%; Refinery inputs slipped by 0.1%. Imports also decreased by 3.4% compared to last week. This is a mixed trend regarding the progress of the oil supply. Based on the changes in Refinery inputs and imports, however, the oil supply slightly contracted last week.

In the recent OPEC meeting, OPEC leaders decided to keep the quota unchanged. The sanctions of Iran did reduce Iran's oil production and its shipment of oil to the West but the total OPEC oil production remained stable in recent months, according to the recent OPEC monthly report.

Demand

In the past couple of weeks, several reports came out that could suggest the U.S economy is showing signs of recovery including: employment rose by 155k in December, manufacturing PMI increased to above the 50 point mark, which means the manufacturing sectors in the U.S are expanding; the GDP for the third quarter was revised up to 3.1% annual growth; the Philly Fed index bounced back in the December survey. The progress of the U.S economy is still unclear, mainly in light of the tax increases that were approved at the beginning of the year, the future debt ceiling talks and potential spending cuts that will be dealt with by Congress and the White House in the coming weeks. Nonetheless, if the U.S economy will continue to show progress, this could pressure up the prices of commodities.

Europe continues to present little growth and thus may impede the growth for the demand for crude oil in this region.

China, the second largest consumer of oil, has recently shown some signs of progress as China's manufacturing PMI remained above the 50 point mark, which means the manufacturing sectors in China are slowly expanding. This report could imply a slow growth in demand for oil in the near future, assuming the PMI will remain above 50.

Finally, the IEA revised up its projected global demand for oil in the last quarter of 2012 to 90.5 mbbl/d. This upward revision could also suggest a rise in demand for oil.

Therefore, the demand for oil in the U.S and China might rise; the supply in the U.S edged down while OPEC's oil production remained stable. This analysis suggests the oil market has slightly tightened.

What's Next for Oil?

The current U.S oil stockpiles are still above last year's stockpiles but have recently declined; the oil market in the U.S seems to have tightened a bit; OPEC's oil production remains stable; global demand for oil rose by a higher than previously projected rate. If these trends will continue, the price of oil might further rise to the high-90s in the weeks to follow. Therefore, if the price of oil will further rally, it could help pull up the stock price of oil companies such as Exxon and oil ETFs such as USO.

For further reading see "Will Exxon Continue To Trade Up?"

Source: Will Oil Continue To Rally?