Syed Rashid Husain
A New Year has begun – and how different this promises to be!
Global energy kaleidoscope has in the meantime undergone complete metamorphosis. Its dynamics have changed drastically, impacting the market psyche, so important and the determining factor in crude markets. 2012 was a different world, a different era, in some senses. Both Brent and US West Texas Intermediate (WTI) crude oil were above $100 per barrel then, reaching a peak in early March of just over $125 per barrel for Brent and almost $110 per barrel for WTI. Positive economic news leading to stronger oil demand and worries about supply disruptions linked to Iran’s nuclear program contributed to firmer prices. Demand from emerging markets was still strong, and numerous supply-side risks, on account of geopolitical issues, were contributing significantly to firmer markets.
Brent prices had already gained by about 16 percent in 2011, with New York Mercantile Exchange gasoline prices up about 15.7 percent. Nymex West Texas Intermediate crude oil rose 7.8 percent in the year. SEB Commodity Research, part of the Swedish bank SEB Merchant Banking, at the beginning of 2012 had said crude oil prices should remain at elevated levels during the year, with Brent prices projected to be around $114 a barrel.
Things have changed since. With the globe entering 2013, market fundamentals are presenting a very different scenario – impacting the energy world in more ways than one. New energy frontiers, have led the world, for the first time in many decades to a real glut like situation.
The issue of peak oil has been firmly put to the dustbin of history – at least for many years. Shale gas, tight oil, sand oil, new frontiers of energy in Brazil, Mexico, off shore drilling, just to name a few, are leading the crude world into a new, distinctly different future.
A “shale revolution” in the US promises to change the market landscape. “US production of shale gas has exploded with a nearly 50 percent annual increase between 2007 and 2011,” a report by the US National Intelligence Council noted, while shale oil production, still in its infancy, could bring anywhere from 5 to 15 million barrels per day by 2020 at a break-even price as low as $44 to $68 per barrel. “By 2020, the US could emerge as a major energy exporter,” the report added. The EIA expects US domestic crude oil production to increase to 7.1 million barrels per day in 2013 — the highest annual average rate of production since 1992.
The International Energy Agency in its recent Monthly Report projects that the global oil demand will remain sluggish throughout 2013 as “economic expansion remains tepid and oil supply levels comfortable,” alleviating the upward pressure on crude prices. The agency pointed to the spectacular growth in US production on the back of a boom in shale oil as one of the top developments for the market in 2013. The IEA also said its estimate of demand for OPEC oil was unchanged for 2013 at 29.9 million bpd, lower than the group’s current production of 31.22 million in November.
Although, many believe that movement toward US energy independence, cleaner energy, recessionary headwinds in EU and the overall slowing global economic growth suggest that longer-term oil prices are heading downwards, yet few are ready to bet on a price crash – at the moment. A price crash in 2013 is unlikely as geopolitical concerns should help support the market, analysts polled by Reuters said. Analysts added that stagnant economic growth and increasing crude supplies are expected to gradually draw oil prices lower. The monthly survey forecasts that North Sea Brent crude oil will average $108 per barrel in 2013, down from an average of $111.71 so far this year.
Goldman Sachs sees Brent averaging $110 next year while Raymond James’ chief economist suggests US-benchmark WTI could fall as low as the mid-$60s, as supply constraints ease across the globe.
“We still think Brent crude prices will dip to average $100/bbl in 1Q2012 as fundamentals ease – OPEC producers would need to be cutting production now to have a significant impact on 1Q balances,” UBS strategist Julius Walker wrote in a note to clients.
“We see an easing of oil prices (in 2013] as demand remains weak,” explained Peter Kiernan, lead energy analyst for the Economist Intelligence Unit, adding that even fast-growing emerging markets and non-OECD nations will experience a poor economic performance next year. He underlined that Brent crude’s resilience is the result of low spare capacity among OPEC nations and a risk premium caused by the potential for Middle East conflict, particularly between Israel and Iran.
RBC Capital Markets’ commodities expert, George Gero, sees WTI trading in a $20-band around the mid-$80s in 2013, adding that excess supply at Cushing, Oklahoma, where WTI is priced, are a result of a lack of transportation and refining infrastructure, along with weak demand. These supplies, coupled with a weaker dollar courtesy of Ben Bernanke and his quantitative easing, should help US energy export growth.
Some analysts are now insisting that a revival in market fortunes remains linked to geopolitics. Barclays oil analysts noted that any significant shift in prices will require either a substantial change in oil-balance fundamentals or significant geopolitical upheaval.
“While there are other likely areas of interest for the oil market in 2013, in our view the main nexus for the transmission into oil prices is likely to be the Middle East, with the spiraling situations in Syria and Iraq layered in on top of the core issue of Iran’s external relations,” said Barclays in a report. The institution confirmed that it is maintaining its 2013 Brent forecast of $125 per barrel — the same level it has predicted over the past 21 months.
The US Energy Information Administration (EIA) predicts that Brent and WTI crude oil spot prices will average $104 per barrel and $88 per barrel, respectively, in 2013. The WTI discount to Brent crude oil, which averaged $23 per barrel in November 2012, is expected to fall to an average of $11 per barrel by the fourth quarter of 2013.
Being able to accurately forecast crude prices is professionally hazardous at the best of times. Yet one does feel that crude prices are likely to fall in the year. Prices are unlikely to see much upside if higher global production amid sluggish economic growth continues. One however is constrained to underline that the ongoing instability in the Middle East is likely to have speculators bidding up the price of crude futures.
Geopolitics continues to pose big uncertainty, adding to the volatility of the markets. 2013 thus may not be much different from earlier years. Any guess?