2013 looks a lot like 2012

New Year 2013 looks as though it will be much like the old one. There’s rioting in Egypt, confrontation with Iran, continued crisis in the Euro-zone, and Texas needs rain—as does most of the US Midwest where drought conditions are still in the severe, extreme, and exceptional ranges. It will be interesting to see the continuing effect on corn supplies and ethanol production.

Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC, said, “On several occasions [in 2012] oil prices seemed poised to move lower in response to global economic weakness, but each time they bounced back on heightened geopolitical risk. What changed in November was that such concerns were not related directly to issues concerning Iran, but to a series of separate conflicts in the Levant [countries bordering the eastern Mediterranean] involving escalating violence in Syria, hostilities between Gaza and Israel, and mounting protests in Egypt.”

As 2012 rushed toward termination, there seemed little chance Congress could hammer out a last-minute agreement on the federal budget and would instead plunge the country off the so-called fiscal cliff of automatic tax hikes and spending cuts. The outcome will be more evident by the time this appears in print, but consumer and investor confidence has already suffered from economic uncertainty and likely will take some time to recover. Even if Congress manages to avoid running off the cliff, the US economy is still in a delicate condition.

Market outlooks

At Barclays Capital Commodities Research, analysts said, “Oil market fundamental should [remain] similar going into 2013. Provided diminishing macroeconomic tail risks hold and in the absence of policy shifts [within the Organization of Petroleum Exporting Countries], Iran’s external relations will have the greatest potential to influence prices next year.” While the gas market continues to waffle with weather forecasts, Barclays Capital analysts said, “There is limited upside for natural gas prices at present. European carbon rose on an absence of sovereign selling, but we expect the heavy sales of [European Union Allowance for carbon dioxide emissions] to weigh on the market.”

On the other hand, vast new supplies of natural gas from shale is giving US petrochemical manufacturers a competitive advantage with lower-cost ethane as a feedstock over foreign competitors that rely on a more expensive oil-based feedstock. A decade of high and volatile gas prices resulted in the closures of many gas-intensive manufacturers. But now favorable oil-to-gas price ratios is driving “a renewed US competitiveness that will boost exports, and fuel greater domestic investment, economic growth, and job creation within the business of chemistry,” said the American Chemistry Council in its yearend outlook.

“Though rising uncertainty over the fiscal cliff, debt ceiling negotiations, and tax reform have hindered business confidence, the most important domestic energy development in the last 50 years is poised to reshape American manufacturing,” said ACC.

Meanwhile, global balance of oil supply and demand indicates rising levels of non-OPEC supply will outpace restrained levels of oil demand growth in 2013. “This will permit both reduced levels of OPEC crude production and rising oil stocks, part of which will be required for strategic stock fill, especially in China,” KBC analysts said. “In the absence of any further significant disruption to oil supplies, the implied combination of rising spare OPEC production capacity and rising consumer oil stocks should attenuate bullish pressures associated with geopolitical risk.”

However, they said, “The oil balance could be a little tighter if the US requires buyers of Iranian crude to deepen their lifting cuts in order to avoid US financial sanctions. On balance, against the backdrop of a weak global economy, KBC expects Brent crude to average close to $110/bbl for a third consecutive year in 2013. Underlying oil market fundamentals are expected to be similar to slightly weaker in 2014 with some limited scope for a further build in stocks or slightly lower call on OPEC crude.”

With improvement in the global economy, they said, “Investors are likely to be more bullish on the outlook for oil demand growth and push further funds into crude futures markets. Thus, even in the absence of conflict, KBC expects Brent crude finally to push above $110/bbl on a more sustained basis in 2014, with an annual average price of around $115/bbl. A more buoyant global economic outlook would likely end any Saudi resistance to moderately higher oil prices.”

(Online Dec. 31, 2012; author's e-mail: samf@ogjonline.com)

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