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The price of oil spiked on Friday of last week after it had declined during recent weeks; furthermore, the future price of WTI (September delivery) increased by 4.7% during August while United States Oil (NYSEARCA:USO) increased by 5.3%. Will this change in oil prices continue? Let's examine the recent developments in the oil market that could explain the recent decline in oil prices, and what could be up ahead for the oil market.

The rally in the price of oil has had a slight positive effect on energy company stocks, such as Exxon Mobil (NYSE:XOM). During August, Exxon's stock rose by 0.7%.

Stockpiles

U.S. oil stockpiles declined by 6.5 million barrels to 1,069.5 million barrels; the current oil stockpiles are 5.2 million barrels below oil stockpiles of the parallel week in 2011. The current price is nearly $1.20 below the price of the parallel week in 2011. The linear correlation between the lagged by two weeks percent change in oil storage and the current WTI oil price is still at -0.285. This relation could suggest that, assuming all things are equal, oil prices will dwindle during this week. As seen below, during recent months there has been a rise in oil stockpiles while the weekly oil price moved in an unclear trend.

Click to enlarge image.

Supply

During last week, U.S oil production rose again by 0.91% compared to the previous week and was higher than the production level in 2011. Imports decreased by 1% compared to last week, refinery inputs by 0.1%. This means the supply slightly contracted and could explain the decline in oil storage.

There are still concerns that the tensions between Iran and the U.S. will lower OPEC's oil production. This week OPEC will issue its monthly report. If the report shows a sharp drop in Iran's oil production, then oil price may rally.

Demand

The recent rally of oil price happened after the U.S. non-farm payroll report came out on Friday and showed a higher-than-expected growth in the number of jobs. But there are still concerns over the progress of other major economies, including China and Europe.

There are several additional reports that could offer some insight as to the progress of leading economies, including the American trade balance report and the IEA monthly report. If these reports show progress, this could suggest the demand for oil will grow.

But for now the demand for oil might rise, while the supply could decline -- i.e., the oil market is tightening up a bit.

Currencies and Oil

The effect currencies have on the development of oil prices is also a factor to consider: The euro/USD rose by 0.79% during August while the AUD/USD rose by 0.63%. During July and August the linear correlation between the euro/USD and oil prices was 0.56, which is somewhat strong. If the euro and other "risk currencies" continue to rally against the USD, they could pull up oil prices.

So what's the bottom line? The appreciation of the euro might have positively affected oil prices; if the euro continues to rise then oil prices will rise further.

There was some positive news with regard to the U.S. labor report that could suggest the demand for oil will rise; however, there are still concerns with regard to supply. If the U.S. oil supply declines further; if the U.S. continues to shows signs of recovery; if OPEC's report presents a drop in production; if the sanctions on Iran have worked -- then I guess this could mean the oil market will tighten further, which will result in the pressuring up of oil prices.

Source: Will Oil Continue To Trade Up?