BMI View: Although d emand realities pulled oil prices down towards the end of October, supply worries - particularly Iran's threat to stop all crude exports - pose a strong upside risk to both our 2012 and 2013 forecasts : US$110/bbl and US$102/bbl respectively for Brent, and US$95/bbl and US$92/bbl respectively for WTI. T he outcome of key political events in the coming months , namely the US presidential election, Chin a ' s leadership transition and the Israeli general election, will be key in determining whether we revise our forecast s . An abundance of production, moderate demand growth and export restrictions in North America underpin our outlook for weak WTI prices to last into 2013.
|*2012 consensus = Q4 Bloomberg estimate + Q1-Q3 2012 average price; f = forecast. Source: BMI, Bloomberg. Consensus correct as of October 31 2012.|
|WTI, US$/bbl - BMI||95||95||92||91|
|Brent, US$/bbl - BMI||111||110||102||99|
|Brent-WTI Spread - BMI||16||15||10||8|
|WTI, US$/bbl - Bloomberg Consensus||96.20||101.00||101.00|
|Brent, US$/bbl - Bloomberg Consensus||115.50||113.00||110.50|
|Brent-WTI Spread, US$/bbl - Bloomberg Consensus||19.30||12.00||9.50|
As expected, prices in the first half of October were mainly held up by supply fears , including Middle East tensions and continued outage from the Buzzard field , but dropped mid-way to hold at about US$110 per barrel (bbl) for Brent by the end of the month. The fall followed the return of the Buzzard field from maintenance and the release of an International Energy Agency (IEA) report that downgraded its forecast for global oil demand and projected strong production growth from Iraq and North America.
|Demand Takes Control|
|Front-Month Brent Crude, US$/bbl (Weekly)|
Evidence that demand had a stronger effect on prices is seen in the failure of Nigerian export outages to sustain a brief rise in prices in the latter half of the month. Damage to the key Bonny crude pipeline, theft and flooding saw Royal Dutch Shell declare force majeure on Bonny and Forcados loadings. However, Hurricane Sandy and the drop in US East Coast demand for crude oil quickly levelled prices by the end of the month.
WTI has been underperforming Brent. While Brent fell 8% since mid-September, WTI saw a 15% drop.
|Front-Month WTI & Brent Crude, Rebased|
Hurricane Sandy contributed to this underperformance. Expectations for the hurricane and its disruptive effects on refinery runs to le a d to a fall in demand for crude weighed on prices . These fears have played out , as US crude stockpiles have decoupled from seasonal norms to rise significantly in recent weeks.
|Sandy Pulls Her Weight|
|Weekly US Ending Stocks Of Crude Oil, Excluding SPR ('000bbl)|
We do not expect any major shifts in production patterns and maintain that for the rest of the year, supply fears arising from political tensions will temporarily prop up oil prices. Prices will eventually edge down as the global market steadily loosens in 2013.
In 2013, we maintain that prices will trend lower, but remain high by historical standards. We forecast Brent to average US$102/bbl and WTI to average US$92/bbl. The assumptions underpinning this view are:
Political risks to supply dynamics will keep prices relatively elevated; Iran's latest threat to stop crude oil exports altogether presents the biggest threat. Iraqi production, which holds some of the most significant promise in terms of boosting global supply, could underperform because of technical challenges and security issues;
Nonetheless, weak global growth will prevent any prolonged upward swing in prices. Our global production forecast shows a healthy supply picture for 2013, with an additional 2.6mn barrels per day (b/d) of new production, compared to the 1.6mn b/d rise we forecast in consumption. This theoretical surplus in the global oil markets - the first in five years - also underpins our oil price view for the coming years;
Saudi Arabia will maintain its commitment to capping global oil prices, making up for supply shortages with increased output;
The discount on WTI relative to Brent will continue, as liquids production from the US continues to rise, thanks to shale oil and Gulf of Mexico (GoM) production.
Our expectations of a healthy oil supply-demand market are echoed in the International Energy Agency (IEA)'s latest report, released October 12 2012 ( see our online service, Oct ober 3, ' Weak Demand Will Battle Supply Fears' ) . The highlights of the report are:
Weak economic growth and rising energy efficiency will slow the rise in oil demand;
Production gains, especially in Iraq and North America, will see supply outstrip demand by more than 6% by 2017.
This forms the basis of our forecast s of US$102/bbl for Brent and US$92/bbl for WTI for 2013 , which is lower than consensus. This divergence from the consensus on WTI, which sees a rise from 2012 prices , is underscored by our view that the North American market will be relatively isolated.
|Muted By Abundant Supply And Export Restrictions|
|Front-Month WTI, US$/bbl (Weekly) & 2013 Average Price Forecast|
Regardless of the outcome of the US presidential election, we expect that US policy will be more supportive of domestic drilling. Although Barack Obama may not subscribe to Mitt Romney's 'energy independence' policy, the current Obama administration has already shown increasing receptiveness towards drilling on federal lands, especially in deepwater post-Macondo. As long as oil prices do not collapse, production is poised to trend upwards in the US, which could even become the world's largest producer ahead of Saudi Arabia. The North American market will also be supported by an expected increase in output from Canadian oil sands.
|North American Liquids Moving Up|
|US (LHS) & Canadian (RHS) Total Oil Production, 2012-2016 ('000b/d)|
However, inadequate export infrastructure and restrictions will see much of this output trapped in North America in the short term. With no significant upsurge in demand expected, there is likely to be an abundance of supply to keep WTI prices down in 2013. Technical factors also lend support to our view that WTI is likely to trend downwards in the short term.
At present, we do see upside risks to our forecast of US$102/bbl for Brent in 2013. Growing Libyan production and the return of South Sudanese crude to the market (with a tentative agreement struck between Sudan and South Sudan for crude transit payment) contribute to our forecast for a slight surplus in 2013. However, we recognise that there are significant political risks in these countries. This is particularly so for South Sudan, which has yet to come to an agreement on the demarcation of borders with Sudan - an issue that could reignite tensions and obstruct output once more.
Oil prices could also be sent soaring if Iran carries out its threat to halt crude oil exports altogether. In reality, its effect could be less pronounced than it appears; in September 2012, Iranian crude exports dropped to 860,000b/d - less than a third of its exports before oil sanctions were imposed and its lowest level since the Iran-Iraq War in the 1980s.
We believe that the loss could be made up with output increases elsewhere, such as North America and Iraq, in a weak demand growth environment. We also expect Russian crude to provide some support, as it continues to hit post-Soviet highs in its monthly crude production, a trend we expect to continue through to 2016. Nonetheless, it would still take almost 1mn b/d off the market and could prompt a price spike.
Awaiting Political Decisions
Pending results from political events in the coming months - the US presidential election and Chinese leadership transition in November, as well as the Israeli general election in January 2013 - we could adjust our 2013 forecast for Brent.
There are rumours that a Barack Obama victory could see the US incumbent continue negotiations with Iran, which could weaken the latter's resolve to cut exports. A Mitt Romney victory seems to suggest that the rhetoric against Iran (and associated tensions) could harden, and enhance the upside risk of Iranian tensions to prices.
Even if Obama pulls through the election, whether or not his administration will succeed in this endeavour will depend on the support it receives from the new Israeli government. Economic measures to revive growth are likely to accompany the handover of political reins to the fifth generation of leaders in China, and help clarify any changes in global demand that we can expect going into the new year.