Oil prices expected to dip in 2013

04 February 2013

Outlook still positive despite experts predicting slight fall in both WTI and Brent benchmark oil prices

One of the most interesting occurrences regarding oil prices over the past two years has been the widening gulf between the world’s two major benchmarks.

In December 2012, the difference between the average price of a barrel of West Texas Intermediate (WTI) and Brent crude was $22.01. When the difference is that great, an oil producer selling millions of barrels a day (b/d) of crude has an easy decision to make regarding the benchmark it wants to adopt.

Oil prices ranging from about $90-115 a barrel, however, will never leave a producer feeling particularly hard done by, unless, like Iran, it is not selling much oil.

Ironically, in 2012 it was the uncertainty surrounding the Islamic Republic’s nuclear programme that was one of the main drivers keeping oil prices high. Economic uncertainly in the eurozone, as well as lower than expected manufacturing figures from the US and China, did not stop Brent from averaging a record $111.68 a barrel in 2012.

The situation in Iran shows no sign of resolution soon and the uncertainty in post-civil war Libya is now extending over the border into Algeria. Despite these factors, many experts are now predicting a dip in oil prices for 2013.

Kuwait’s Global Investment House (GIH) expects the price of a barrel of WTI to vary between $85 and $90 a barrel in 2013 from the $94.1 average of 2012. The US’ Energy Information Administration has forecast a drop in the Brent benchmark to $105 a barrel.  

Opec expects consumption to grow by 770,000 b/d, which is almost identical to the 2012 level of 760,000 b/d. Slow recovery in Europe and the US means that, according to GIH, China will account for 46 per cent of oil consumption growth in 2013, up from 40 per cent in 2012.

Middle East producers will be happy if the oil price remains in triple figures and a drop to $105 a barrel will still mean their ambitious budget targets are being met.

As the world’s swing producer, Saudi Arabia has assumed the responsibility of reacting to market conditions by either increasing or decreasing its production. Riyadh has said in the past that it sees $100 for oil as a “fair price” to pay. It learned the hard way in 2008-09 what a spike in price can do and will not want a repeat.

With Saudi Arabia having more than 2.5 million b/d of spare capacity and Iraq ramping up its capacity each year, there is relative stability in the market and this is likely to remain.

The Iran issue is likely to get worse, however, before it gets better and the recent siege crisis in Algeria has caused ripples of concern. Any escalation in these areas could force prices up.

On the flipside, high oil prices also mean that non-Opec producers, such as the US and Canada, can afford to initiate production from what were previously prohibitively expensive non-conventional sources.

A boom in non-conventional oil and gas could change the narrative sharply towards the end of the decade, but, despite a slight dip in price, in the short term the outlook remains positive for the region’s major oil producers.  

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