Where Are Oil Prices Headed In 2013?

It was widely speculated that oil prices in 2013 would be impacted by many of the same concerns of 2012. And oil prices are reflecting this, having dipped to below $100 a barrel, as we round off the first quarter of 2013.

Prices in 2012 remained north of $100 barrel per day (bpd), despite a weak global economy and a stable oil supply from the Organisation of Petroleum Exporting Countries (OPEC), due to worries about a nuclear standoff with Iran and the impact of Arab Spring on production in the Middle East and North Africa. Even OPEC, the 12-member organisation that pumps 40 per cent of the world’s oil, kept its oil production quota unchanged last year at 30 million bpd due to these lingering concerns. Already we’re seeing signs of improved growth in the American economy and a more conciliatory approach from Iran and the Group 5 +1 (the UN Security Council’s five permanent members,and Germany). Both sides held talks in March and in Kazakhstan early in April.

“It might be a Rip Van Winkle year; if you go to sleep in 2013, you will not miss much, but you also won’t wake up in the middle of the night screaming,’’ said Jason Schenker, president of Prestige Economics in Texas. Schenker expects “modest growth” in the US, the world’s number one oil consumer in 2013, which will help the global oil market. But he also agrees that Europe could pose downside risks to commodity markets unless the situation improves.

Meanwhile, Credit Suisse has forecast a Brent crude price average of $115 bpd for 2013, while analysts at Barclays Capital are a bit more bullish, estimating Brent prices to reach up to $135 by year-end. “The continued political uncertainty and an unsettled economic environment is putting a bid under oil and keeping it above $100 a barrel,” said Bill Farren-Price, CEO of Petroleum Policy Intelligence.

The stagnant economy in the US, the austerity drive in Europe, the weakening recovery in Japan and signs of weakness in the once buoyant emerging economies, particularly China, weighed on oil prices in 2012. In addition, geopolitical issues and concern about additional supply impacted the market and caused world oil demand growth forecasts to be revised downwards many times.

“It’s been a record year, the Brent price averaged $112 a barrel for 2012,” said Neil Atkinson, head of research for Datamonitor. “That’s the best year in history, apart from some of the early years when prices were very volatile.”

The state of the global economy was the main focus throughout 2012, experiencing what OPEC President and Iraqi Oil Minister Abdul-Kareem Luaibi Bahedh called in December a lack of “clear vision on the economic front.” Prestige Economics’ Schenker explains why the obsession with the global economy matters. “The reason the US and Europe are so critical is that they’re the end consumers and to put it in oil terms, they’re the down stream.

“Countries like China that manufacture and India that provides a lot of services are the mid-stream markets, whereas other countries like Brazil, Australia are the upstream markets,” he added. These are the regions that provide the raw materials that go into China for manufacturing and are then exported and sold to the global market. But it is important not to get too fixated on Chinese growth because, if the US and Europe are slower, everything is impacted.

“You can try to create endogenous growth in China, but this will not replace the significant demand from consumers in those end markets. Therefore, the health of these end markets is critical
as this is where consumers are globally, the highest consumers of crude and highest consumers in general,” Schenker explained.

Geopolitics was another key focus for the first quarter of 2012, particularly the nuclear standoff with Iran. Sanctions hurt Iran’s oil exports and its economy. The pressure was stepped up when the European Union joined the international sanctions. Iran still managed to sell some oil, but analysts estimate that exports have been halved. Iran’s total oil production has fallen to around 2.7 million bpd in 2012, almost a million barrels lower than in 2011, according to the Economist Intelligence Unit (EIU).

“Iran’s oil production and exports fell sharply in 2012, and we expect a further decline in 2013,” said EIU commodites analyst Caroline Bain. Iran’s oil sector has long suffered from chronic underinvestment, and “many of Iran’s productive fields are reaching the stage where they require a continual application of sophisticated techniques to raise recovery rates,” she added.

Any disruption of oil supply could send the market skyrocketing. That’s why the Saudi Arabian oil minister Ali Al Naimi was quick last year with reassurance that his country could add two million bpd to the market “almost immediately.” He favoured a price of $100 a barrel as a suitable average for oil producers and a price that would bring stability to the market, in line with comments from other OPEC ministers. OPEC Secretary General Abdalla Salem El-Badri reiterated last year that the organisation did not want extreme prices, while cautioning the state of the Europe remained a problem. Analysts tend to agree with ministers and have said the health of the Eurozone continues to pose a big threat. “Europe really has not delivered, its economy has not delivered, and it’s the continual drip, drip of no real solution that was not really very helpful,” said Cornelia Meyer, CEO of research firm MRL Corporation in London.

Meanwhile, Libyan oil was coming back on the market, producing around 1.4 million (bpd), close to pre-war levels and Iraq boosted production above 2 million (bpd) and said it was aiming to produce 6 million (bpd) in the coming years. “Iraq is emerging as a country with very strong prospects for production growth,’’ said Datamonitor’s Atkinson. “So within OPEC itself there are signs of rising production from some members and this overall picture of rising supply and possible weak demand is the big overhanging threat as far as prices are concerned.”

Fatih Birol, the chief economist of energy advisor to industrialised countries the International Energy Agency (IEA), said the agency expected Iraq’s oil production of 3.4 million bpd to double by 2015. Iraq took over as OPEC’s number two producer in 2012 and analysts fear that the organisation might see some conflict as Iraq remains out of the quota system. “Iraq is emerging as a country with very strong prospects for production growth,” said Atkinson from Datamonitor.

“There are signs of rising production from some OPEC members and this overall picture of rising supply and possible declining demand is the big over-riding threat as far as prices are concerned.” Analysts agree that this could put Iraq at odds with Saudi Arabia in the event any production cuts are needed in the early part of 2013 and beyond. At the final OPEC meeting of the year, Iraq’s OPEC governor Falah Alamri said his country had no intention of cutting production and said that this was “a sovereign issue, not an OPEC issue.”

Instability in the Middle East and North Africa affected oil prices in 2012, especially the Arab Spring. Middle East hostilities in Israel and Palestine also escalated in November and this had traders nervous, but after eight days of fighting, calm returned at the end of the month when Egypt brokered a ceasefire.

“Further upward pressure was the upheaval in the Middle East and while they are not the oil producing countries; psychology it had an impact and markets are inherently psychological,” said Meyer from MRL Corporation. “The situation in Syria continued to deteriorate and civil unrest in Egypt added to the tension and uncertainty in the region.”

Political instability will continue to impact the oil price and a recent report from the EIU said “Iraq’s problems and the Iranian nuclear standoff aside, Libya and Egypt are adjusting to life under new regimes while Syria’s civil war blazes on. Global oil prices will therefore continue to factor in a hefty risk premium.”

Outside the Middle East, increased Europe really has not delivered, its economy has not delivered, and it’s the continual drip, drip of no real solution that was not really very helpful. Production from America’s unconventional shale formations is expected to impact prices. The US saw record domestic oil production in 2012, with a high of 6.6 million barrels a day, increasing to seven million barrels in February 2013, the highest production since May 1995. Analysts tend to agree the impact could be temporary on prices because the US still remains the world’s biggest energy importer. The IEA has forecast that US production would be greater than the combination of current leading players, Russia and Saudi Arabia by 2020.

Some leading independent analysts believe that American shale oil production will begin to decline in 2020, meaning many Middle Eastern producers could regain the top producing spots in conventional and non-conventional production. Still, OPEC is keeping an eye on this rising production.

“Shale oil is a new player on the market and we are watching it, but it does not adversely affect OPEC because energy demand will increase by 54 per cent till 2035. So there is room for everybody, room for gas, coal and biofuels, for all sort of energy,” said OPEC’s El-Badri.