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During last week, the price of oil (WTI) increased by 1.61%. United States Oil (NYSEARCA:USO) rose by 2.3%. Will this rally continue in the weeks to follow? Let's examine the recent developments in the oil market and figure out what is next for oil prices.

The rise of oil has had a positive effect on energy companies' stock such as Chesapeake Energy Corporation (NYSE:CHK): During August, Chesapeake's stock rose by 5.4%.

Stockpiles

During last week, the U.S. oil stockpiles declined by 3.7 million barrels and reached 1,065.8 million barrels. There is a negative relation between the changes in oil stockpiles and oil prices. I.e. as oil stockpiles decline, the price of oil tends to rise the following week. Since oil stockpiles fell in the past couple of weeks, and since there is a negative correlation between stockpiles and prices, this could suggest (assuming all things being equal) oil prices will rise during this week.

(click to enlarge)

Supply

During last week, the U.S oil production edged down by 0.13% compared with the previous week but was higher than the production level in 2011. Refinery inputs declined by 0.27%. Imports remained unchanged compared with last week. This means the supply slightly contracted and could explain the decline in oil stockpiles.

There are still concerns that the tensions between Iran and U.S. will lower OPEC's oil production. The recent renewed tension between Israel and Iran and whether Israel will attack Iran raises the anxiety levels in the Middle East. But for now there isn't a sharp change in OPEC's oil production: According to the recent OPEC monthly report, the OPEC oil production slightly declined. The oil production of Iran slipped below the 3,000 thousand barrels per day.

Demand

The recent rally of oil prices may reach a halt especially over the concerns of the economic slowdown in Europe: EU GDP contracted again by 0.2% during the second quarter of 2012. The economic situation in China, one of the leading consumers of oil, isn't improving either. There are some analysts who think China will issue a stimulate plan that could jump-start China and eventually rally the demand for oil.

There are several reports that could offer some insight as the progress of the U.S including: U.S retail sales, Philly Fed survey. If these reports show progress this could suggest the demand for oil will grow in the U.S.

What's the bottom line?

There was some positive news in regards to the U.S (retail sales report) that could suggest the U.S economy is progressing, but in other economies, China and the EU, the situation isn't improving. If the central banks of China and the EU issue a stimulus plan that will rally these economies it could also positively affect these economies' demand for oil.

If the U.S oil supply continues to fall, if the U.S will continues to show progress, if the EU and China issue stimulus plans and if the tension in the Middle East progresses, then I guess oil prices will continue to rise.

For further reading: Crude Oil Prices - Weekly Outlook August 13-17

Source: Will The Oil Rally Come To An End?