2013 Oil Market Outlook

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From Jan. 2012 oil outlook: “…Barring a major issue with Iran, which could send prices to $150 and above, prices should ratchet up slightly to track between $85 and $120 per barrel (WTI), averaging $105-110.”  Clearly too bearish--average actual WTI 2012 was about $94, with a weekly average range of $80 to $108.

 

  

For 2013, What the ‘pros” say:

USDOE.  EIA STEO Jan. 2013:  Brent and WTI crude oil spot prices to average $105 and $89.5 per barrel, respectively, in 2013. The projected WTI discount to Brent crude oil, which averaged $23 per barrel in November 2012, falls to an average of $11 per barrel by the fourth quarter of 2013.

Reuters’ annual survey of 26 analysts showed an average forecast of $108 for Brent in 2013, down from $112 in 2012, and WTI at $94.  Four put 2013 Brent above $115 in 2013, including Goldman Sachs, who calls for Brent at $130 and WTI $126, as capacity on the Seaway pipeline hits 400,000 b/d.

Upside Factors

Middle East

Iran.  Nuclear program--US, Europe sanctions; Iranian interference with Straits of Hormuz; this year Iran’s program could reach the point of triggering Israeli a/o U.S. military response.

Iraq, Syria and Egypt all placing strains on relations among ME countries and between them and the U.S.  Pipeline sabotage plagues Yemeni production and Syrian production unlikely to stabilize soon.

Global demand. The IEA sees continued sluggish demand in 2013, rising .865 mmb/d to 90.5.  Demand up .85 mmb/d in 2012 (vice 1.3 projected).

   Turnaround in economic growth rate could boost oil demand in China, the world’s 2d largest consumer.  India, Russia, Saudi Arabia and Brazil follow Japan in oil consumption and will see 2013 oil demand grow 2.5 to 4.5%, the IEA forecasts, as Japan’s demand slumps more than 3%. 

     The U.S. remains by far the world’s largest oil user at >18 mmb/d. 2013 oil demand growth >0.5%, mostly on freight shipments and industrial use.

Dollar. A declining U.S. dollar in 2013 will tend to push up oil prices. 

   Both U.S. economic growth and the dollar’s value are tied to resolution of long-term U.S. debt issues, but with opposite effects.

Downside Factors

Europe.  Demand in 2012 contracted sharply, -6.0% in 3Q12.   In 2013, European oil demand will decline less rapidly, weighted to the first half. The IEA also foresees North Sea oil output declining some 0.18 mmb/d.

MENA.  Increasing production by Libya and Iraq would depress prices, but Saudi will offset.  In Africa, a border security zone agreement between Sudan and South Sudan continues to stall export resumption.    Iran returns…?  Iran could be an outlier on the downside:  if the June presidential elections in Iran bring it back to the negotiating table with the EU and US, both could reduce sanctions, thus putting up to 1mmb/d of Iranian oil back on the global market.

North America.  The IEA expects a robust jump of 0.35 mmb/d in Canadian oil production, based on increased output from oil and tar sands.  Higher production in the U.S., mostly from tight oil and shale oil formations, will add 0.5-0.9 mmb/d, dropping U.S. liquid fuel imports to less than 40% of consumption for the first time in more than two decades.  Put simply, the US and Canada are likely to increase oil production in 2013 more than the total rise in global oil demand.

My Call

Once again, the outlier is Middle East politics.  Based on market fundamentals, oil prices should be less volatile in 2013.  WTI should trade in a narrower range of $80 to $100 per barrel, rising throughout the year, with an average a bit above $90.  Brent ends year at about $115.

©  Robert S. Price Jr., International Risk Strategies, Tampa, FL Jan. 2013 (Originally presented to the Longboat Key Economic Roundtable.)

China's Strategic Oil Reserves

David Winning wrote in the Dec. 19 edition of the Wall Street Journal about China’s announcement to establish a center to manage its strategic petroleum reserves (SPR). It noted that during the U.S.-China Strategic Economic Dialogue in China the previous week, both sides agreed to cooperate more closely on construction and management of SPRs. Winning further noted that as China is not a member of the International Energy Agency of the Organization for Economic Cooperation and Development, it is not bound by IEA guidelines that limit SPR use to times of supply disruption vs. using the Chinese SPR as a buffer stock to influence domestic prices.

While China appeared initially to view their reserves as a buffer stock, both US and IEA officials have had extensive discussions with Chinese officials, particularly at the National Development and Reform Commission (the successor to the State Planning Commission) about SPR policy. In particular, they have emphasized that China’s reserves--currently less than 20 million barrels or coverage for about 5 days of oil imports--would have little impact on world oil prices used on their own. Thus, it is to China’s advantage to leverage any withdrawal from its SPR with the IEA, whose members at end 2006 held some 4,100 million barrels or coverage for 122 days of their oil imports.

To aid China in its considerations of oil stock policies, the United States hosted a delegation from China in June 2001 for discussions of strategic petroleum storage policy at Department of Energy headquarters in Washington, followed by a tour of the U.S. Strategic Petroleum Reserve at Bayou Choctaw, Louisiana. The U.S., Japan and other member countries of the IEA encouraged the Agency to conduct a “Seminar on Oil Stocks and Emergency Response” in Beijing in December 2002. Further, senior Chinese officials have participated as observers and commentators at the last four biennial IEA Ministerial meetings.

In July 2005, the Energy Working Group of the Asia-Pacific Economic Cooperation forum, of which China is a member economy, held an Oil Stocks Workshop in Honolulu. The U.S., Japan, Korea and others gave presentations on both policy and practicalities of constructing, financing and using strategic oil stocks, based on their past experiences, while China and India gave presentations on their plans to build, manage and finance strategic oil stocks. The latest development in China is a new draft energy law that also would require Chinese oil companies to maintain strategic oil stocks. If held as oil products, rather than crude oil, this could increase Chinese oil supply security. The U.S. discovered, during the 2005 devastation caused by Hurricanes Katrina and Rita, that having only crude oil reserves created a problem when a significant portion of the country’s refining capacity was down.

Thus, while it certainly is true that China is not bound by IEA decisions--not being a member country--it understands that it can significantly magnify the impact of its actions by coordination with the IEA and has continued to consult with both the IEA and its member countries as China develops its strategic petroleum reserve capability.

Chinese Leadership Changes

While attending the 8th US-China Oil & Gas Industry Forum in San Francisco this week, heard a lot of buzz about possible Chinese leadership changes. These changes won't occur at during the Chinese Communist Party Congress, which begins October 15, but more probably will be announced during the National People's Congress meeting in March 2008. The first changes concern the National Development and Reform Commission (NDRC), the successor to the old State Planning Commission. Rumor is that former SPC Chairman and current vice premier ZENG Peiyan will retire and be replaced as vice premier by current NDRC Chairman MA Kai; in turn, MA will be replaced as NDRC Chairman by current vice chairman CHEN Deming, who overseas energy matters at NDRC, in conjunction with vice chairman ZHANG Guobao, who is expected to retire. Also, there was talk that FU Chenyu, currently president of the China National Offshore Oil Corp. (CNOOC) will be named as minister of commerce or as governor of one of China's provinces.