What was unique about the oil markets in 2012? What to expect in 2013? And how will OPEC and Saudi Arabia respond if demand weakens or new supply became readily available? Three paramount questions that need to be answered in order to illuminate the key forces acting in the oil markets especially that the global economy is still fraught with uncertainty.
To start with, an important facet to be mindful of while following oil markets is the inherent volatility that have been witnessed during the last five years, albeit the historically elevated year-end price levels, as demand downside risks and supply uncertainties from the unfolding sovereign debt crisis and geopolitics continue to lurk in the background.
In a similar fashion to 2008 when the price of the benchmark West Texas Intermediate (WTI) fell sharply in less than six months from $145 per barrel in early July to a mere $30 per barrel in December of that same year, 2012 was no different with Brent, the North Sea benchmark, fluctuating in a $88-125 per barrel range.
If such volatility is a new norm that stakeholders in the oil industry had to contend with since 2008, the increased irrelevancy of WTI as a benchmark for global prices became a reality last year.
The main reason behind the WTI crude losing its proxy status is the fact that it was dragged lower by a deepening supply glut from the shale boom across the US Midwest that led to transportation bottlenecks due to the limited capacity of the existing pipelines.
Accordingly, the US biggest production increase since 1950s and the rise in stockpiles at Cushing, Oklahoma, the largest storage hub in the US and the delivery point for the New York Mercantile Exchange futures, resulted in a record discount for WTI that averaged around $17.5 per barrel less than Brent in 2012 compared with an average premium of USD95 cents during 2000-2010.
It is no surprise, in my opinion, that the US Energy Information Administration have decided in July last year for the first time ever to drop the increasingly domestic benchmark for the Brent that is more indicative of global prices.
What does the future hold for oil prices in 2013? Definitely, it is a hard call to make, with expectations at both ends of the spectrum, with some analysts seeing the risks skewed to the upside due to the geopolitical tensions and fault lines in the Middle East while others believing that risks are overwhelmingly on the downside emanating from feeble global economic growth.
I, however, do subscribe to a “story of two halves” that views demand side factors as the driving force in 1H 2013 contrary to the second half of the year whereby supply factors will take the lead. On the demand side, the US debt ceiling, currently at $16.4 trillion, had already been breached by the end of last year and the Treasury department via its extraordinary measures will be able to borrow for January and February, which implies that another showdown a’ la fiscal cliff will raise uncertainty and weigh negatively on oil prices in the first quarter of 2013.
Central banks, however, have put a floor under the oil markets by filling the void left by the austerity measures adopted by most governments, as their unprecedented accommodative policies support economic growth.
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