Oil could strike a new record in 2012

Bloomberg
December 22, 2011, 9:29 a.m.

Crude oil may rise for a fourth year to a record average price in 2012 as demand in emerging markets increases and the U.S. avoids a recession.

West Texas Intermediate oil on the New York Mercantile Exchange will reach an average of $100 a barrel in 2012, based on the median of 27 analyst estimates compiled by Bloomberg, topping the all-time high of $99.75 set in 2008. The U.S. benchmark is on course to average $95 a barrel this year.

Evidence that stimulus measures are reviving the U.S. economy while countries from India to Brazil keep expanding is raising the outlook for oil consumption next year. Global demand will climb 1.4 percent, with China accounting for more than a 10th of the amount used, according to the International Energy Agency. Crude in New York advanced 8% in the year through yesterday.

"High prices come from very well-supported fundamentals," Mike Wittner, the head of oil-market research at Societe Generale SA in New York, said by phone on Dec. 15. "Supplies are very tight, at five-year lows," in the world's leading economies, said Wittner, who projects West Texas Intermediate oil will average $103 a barrel in 2012.

Industry-held supplies in the 34 members of the Organization for Economic Cooperation and Development fell 1.4 percent to 2.63 billion barrels in October, leaving them below the five-year average for a fourth month, the IEA said in a Dec. 13 report. Stockpiles of heating oil and diesel held in OECD countries dropped 23.1 million barrels to 538.4 million in October, a three-year low.

"We need to see prices rise to a level where we get supply and demand to balance without drawing on inventories," David Greely, head of energy research at Goldman Sachs Group Inc. in New York, said by phone on Dec. 15.

A worsening of Europe's debt crisis or an escalation of tension between Iran and the U.S. and its allies over the Persian Gulf country's nuclear program would negate present oil price projections, Wittner said.

"Saying the market will be broadly range-bound may sound boring but there are big risks out there," said Wittner, the second-most accurate forecaster for Brent among analysts ranked by Bloomberg in the past eight quarters. "The risk of a euro- zone explosion isn't a little bearish, it's a lot bearish. The risk of an escalation of the Iranian situation isn't a little bullish, it's a lot bullish."

Iran pumped 3.56 million barrels of crude a day in November, according to a Bloomberg News survey of oil companies, producers and analysts. It trailed only Saudi Arabia among members of the Organization of Petroleum Exporting Countries. Crude prices more than doubled in 1979 when Shah Mohammed Reza Pahlavi was toppled, slashing the nation's oil exports.

"Iran remains the wild card," said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. "If conflict rears its ugly head, prices will surge."

The European benchmark grade has advanced to a record average of $110.97 a barrel this year. It will be $109 in 2012, according to the median of 28 analyst estimates compiled by Bloomberg.

"Brent has averaged a little more than $110 a barrel this year and inventories have drawn consistently throughout the year, telling us that demand exceeds supply at $110 a barrel," Greely said.

The collapse of Libyan exports and field maintenance in the North Sea reduced supply and helped increase prices this year. Libyan output rose 155,000 barrels to 500,000 a day in November, the highest level since February, the survey showed. Production in the North African nation had tumbled from 1.585 million barrels a day in January, the last month before an uprising against the government of Muammar Qaddafi disrupted output.

Production at the Buzzard field, the biggest stream in the North Sea Forties oil blend, one of four grades that make up Dated Brent, fell in the third quarter because of maintenance. North Sea output has tumbled since the 1990s, with the U.K. pumping 1.34 million barrels a day last year, down 54% from a peak 2.91 million in 1999, according to BP Plc, which published its Statistical Review of World Energy on June 8.

"The market is still tight even with Libya coming back," Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, said by phone on Dec. 16. "Global GDP and energy demand are still growing," said Sieminski, who estimates New York futures will average $95 a barrel in 2012.

The world economy is projected to grow 2.7% this year and 2.4% in 2012, according to data compiled by Bloomberg. The gross domestic product of the U.S., the biggest crude consuming country, is anticipated to rise 1.8% in 2011 and 2.1% next year, the data show.

Emerging-market crude consumption will grow 2.8% to 43.3 million barrels a day this year and 3.6% to 44.9 million in 2012, according to the IEA, an adviser to 28 industrialized nations including the U.S., Japan and Germany. Chinese consumption will rise 5.3% to 10 million barrels in 2012, the Paris-based agency said Dec. 13.

Russian consumption will surge 6.1% to 3.48 million barrels in 2011, as Indian and Saudi Arabian demand grow more than 3%, the IEA reported.

The prospect of additional stimulus from central banks to bolster economic growth is also supporting prices, Greely said. The U.S. Federal Reserve's present $400 billion "Operation Twist" program to replace some shorter-term debt follows two previous rounds of asset purchases, or quantitative easing.
Crude oil may rise for a fourth year to a record average price in 2012 as demand in emerging markets increases and the U.S. avoids a recession.

West Texas Intermediate oil on the New York Mercantile Exchange will reach an average of $100 a barrel in 2012, based on the median of 27 analyst estimates compiled by Bloomberg, topping the all-time high of $99.75 set in 2008. The U.S. benchmark is on course to average $95 a barrel this year.

Evidence that stimulus measures are reviving the U.S. economy while countries from India to Brazil keep expanding is raising the outlook for oil consumption next year. Global demand will climb 1.4 percent, with China accounting for more than a 10th of the amount used, according to the International Energy Agency. Crude in New York advanced 8% in the year through yesterday.

"High prices come from very well-supported fundamentals," Mike Wittner, the head of oil-market research at Societe Generale SA in New York, said by phone on Dec. 15. "Supplies are very tight, at five-year lows," in the world's leading economies, said Wittner, who projects West Texas Intermediate oil will average $103 a barrel in 2012.

Industry-held supplies in the 34 members of the Organization for Economic Cooperation and Development fell 1.4 percent to 2.63 billion barrels in October, leaving them below the five-year average for a fourth month, the IEA said in a Dec. 13 report. Stockpiles of heating oil and diesel held in OECD countries dropped 23.1 million barrels to 538.4 million in October, a three-year low.

"We need to see prices rise to a level where we get supply and demand to balance without drawing on inventories," David Greely, head of energy research at Goldman Sachs Group Inc. in New York, said by phone on Dec. 15.

A worsening of Europe's debt crisis or an escalation of tension between Iran and the U.S. and its allies over the Persian Gulf country's nuclear program would negate present oil price projections, Wittner said.

"Saying the market will be broadly range-bound may sound boring but there are big risks out there," said Wittner, the second-most accurate forecaster for Brent among analysts ranked by Bloomberg in the past eight quarters. "The risk of a euro- zone explosion isn't a little bearish, it's a lot bearish. The risk of an escalation of the Iranian situation isn't a little bullish, it's a lot bullish."

Iran pumped 3.56 million barrels of crude a day in November, according to a Bloomberg News survey of oil companies, producers and analysts. It trailed only Saudi Arabia among members of the Organization of Petroleum Exporting Countries. Crude prices more than doubled in 1979 when Shah Mohammed Reza Pahlavi was toppled, slashing the nation's oil exports.

"Iran remains the wild card," said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. "If conflict rears its ugly head, prices will surge."

The European benchmark grade has advanced to a record average of $110.97 a barrel this year. It will be $109 in 2012, according to the median of 28 analyst estimates compiled by Bloomberg.

"Brent has averaged a little more than $110 a barrel this year and inventories have drawn consistently throughout the year, telling us that demand exceeds supply at $110 a barrel," Greely said.

The collapse of Libyan exports and field maintenance in the North Sea reduced supply and helped increase prices this year. Libyan output rose 155,000 barrels to 500,000 a day in November, the highest level since February, the survey showed. Production in the North African nation had tumbled from 1.585 million barrels a day in January, the last month before an uprising against the government of Muammar Qaddafi disrupted output.

Production at the Buzzard field, the biggest stream in the North Sea Forties oil blend, one of four grades that make up Dated Brent, fell in the third quarter because of maintenance. North Sea output has tumbled since the 1990s, with the U.K. pumping 1.34 million barrels a day last year, down 54% from a peak 2.91 million in 1999, according to BP Plc, which published its Statistical Review of World Energy on June 8.

"The market is still tight even with Libya coming back," Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, said by phone on Dec. 16. "Global GDP and energy demand are still growing," said Sieminski, who estimates New York futures will average $95 a barrel in 2012.

The world economy is projected to grow 2.7% this year and 2.4% in 2012, according to data compiled by Bloomberg. The gross domestic product of the U.S., the biggest crude consuming country, is anticipated to rise 1.8% in 2011 and 2.1% next year, the data show.

Emerging-market crude consumption will grow 2.8% to 43.3 million barrels a day this year and 3.6% to 44.9 million in 2012, according to the IEA, an adviser to 28 industrialized nations including the U.S., Japan and Germany. Chinese consumption will rise 5.3% to 10 million barrels in 2012, the Paris-based agency said Dec. 13.

Russian consumption will surge 6.1% to 3.48 million barrels in 2011, as Indian and Saudi Arabian demand grow more than 3%, the IEA reported.

The prospect of additional stimulus from central banks to bolster economic growth is also supporting prices, Greely said. The U.S. Federal Reserve's present $400 billion "Operation Twist" program to replace some shorter-term debt follows two previous rounds of asset purchases, or quantitative easing.

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