Over supply could push WTI Crude Oil to $65 in 2013
By Paul A. Ebeling, Jnr. | December 5, 2012 12:06 AM EST
WTI closed November just off of 89 bbl Monday on hopes of an improving economy. There is an argument for an improving economy in 2013, but just now it is to early to tell how things are going to work out for the US economy, what with the F-Cliff, and the consequences of the anti-business, social agenda, political leadership of the last 4 yrs and the 4 yrs to come.
The legislative and fiscal policies in the USA of the last 4 yrs, the related costs and unintended consequences of these policies like higher taxes, increased healthcare costs, and increased business regulation costs, are not fully understood, and may never be. So it remains to be seen if the economy will improve and when.
Many analysts are forecasting 2013 to see a chance of another recession.
For the sake of this article, let us take the best case scenario for a stronger Y 2013 economy in the USA, this being the case it will not effectively change the demand picture for petroleum products in a mature market like the US to any degree.
Add to that, and with the latest employment data coming from Europe, and the slowdown hitting Germany it appears Europe is not going to see a strong Y 2013 either.
Looking at Asia, specifically China, it looks to be coming off a bottom, but the days of 12% economic growth are over for the emerging markets because they have emerged.
China has infrastructure and inflation constraints that hamper growth levels higher than 7.5% going forward, and real growth may be much less than they report. This reality has been priced into the Chinese stock market, it has had a bad year.
Looking to Japan, they are about to have another leadership change, the 7th in 7 yrs, and this economy is in a state of perpetual deflationary decline which has lasted for 20 yrs. Despite the new leadership change, Japan has major demographic and anti-competitive businesses constraints that auger more of the same for 2013.
Back to the US market; the mature market there may turnout the best economy of the major economies and users of petroleum products in Y 2013, but that will not say much from the demand side.
Now for the supply side; this is the problem for the Crude Oil Bulls and partly the reason so many funds got killed in Y 2012 trying to aggressively invest in Crude Oil through Futures, and ETF`s. No established trends took hold because the supply levels globally and domestically are well above the 5 yr average, and at the top of that 5 yrs range.
That being the case we saw falls in WTI from 109 to 78 totaling 31 bbl, and 100 to 84 totaling $16 bbl, which is not good for a fund manager investing for the long-term.
On analyst I read notes, that, “the most noteworthy trend in the Oil markets for Y 2012 is the increased role of US and Canadian production, and it is only going to get stronger for 2013 and into the future. The trend is definitely not a fluke; we have had a nice run of over a decade of high prices which has spurred a lot of economic investment into new technologies and an increase in smaller, independent operators searching for opportunities to make money by producing Crude Oil in North America.”
The industry is just now starting to see the results of the increased capital investment, and just like Shale Nat Gas, these projects once they get going stay going, even as prices fall.
We can expect nothing less for Crude Oil because there just are not a lot of areas where one can make the kind of margins attainable in the Crude Oil market. It is a good business to be in versus many other industries vying for capital resources.
To give you an idea of some of thie dynamic change in US Crude Oil production numbers, the United States is on track for a 7% increase in Crude Oil production this year to an average of 10.9-M BPD, and the US Department of Energy is forecasting that US production of Crude Oil and other liquid hydrocarbons will average 11.4-M BPD in Y 2013. For your reference: Saudi Arabia’s output is approximately 11.6-M BPD.
One big reason the price of Crude Oil is not much lower now is that there has been a big increase in Crude Oil storage in both China and the USA.
Example: Cushing Oklahoma which is the location the WTI Futures contract is based upon, had a storage capacity of approximately 47-M bbls in March 2011, with the increased capacity it now stands just above 60-M bbls as of March of Y 2012.
And, on 30 September 2011 Cushing had just under 30-M bbls in storage, as of last week Cushing has 46-M bbls stored, this is an increase of 16-M bbls in 1 yr, if it repeats in Y 2013, which all signs point to as the trend is getting stronger not weaker, then Cushing will be running out of working storage capacity of just over 60-M bbls. You can rest assured that Cushing is building more workable storage capacity now, but at some mark the Big Q Why is asked, Y 2013 is when WTI will start to price in some of this supply glut that comes from increased US and Canadian production.
The supply glut is felt in total US inventory levels, not just in WTI, which to quote directly from the EIA Report: “At 374.1-M bbls, US Crude Oil inventories are well above the upper limit of the average range for this time of year.” The US Inventory level will probably bust through the 400-M mark in Y 2013 for the 1st time in history.
Crude Oil prices are been supported by international cases of many supply disruptions during the past 2 yrs, and this Crude Oil is coming back online, and more output internationally is expected.
Libyan Crude Oil is now up to full speed, Iraq output had been greater than expected, and Iraq has the potential for much more on the upside if all of their new projects start producing, not only for Y 2013, but for the next 10 + yrs, that’s dependent on political stability there.
Remember about international Crude Oil, everybody needs money, regardless if your extremist, Islamic fundamentalist, or Democratic it all comes down to the need for money, and whoever the Big Boss is, is going to need to monetize resources, and these countries have very little competitive options other than Crude Oil for generating revenue, and as we know and see, one way or another this Crude Oil finds its way to the market.
Many of the international countries strong in Crude Oil resources need to generate Crude Oil revenue because a large portion of their respective populations is subsidized through their Crude Oil exports, this trend will continue as it has for the last 40 yrs + with no major supply disruptions to be sure.
We can expect that OPEC will have to begin to consider supply cutbacks in Y 2013 to address swelling inventory levels globally. Here is the rub, they may talk up the market with production cuts, but the truth is that the incentive is even greater for cheating on quotas the lower the price goes, because the governments still have budgets based upon the same level of revenue, and the only way to get the same revenue with lower prices is to lift and sell more Crude Oil.
There fact is that there is much more capacity coming online in Y 2013 internationally, and governments from Iraq to Sudan always need money, and will lift towards capacity, this is Bearish for Brent Oil prices too, so we may expect Brent to test the 85 bbl mark sometime in 2013.
The past 10 yrs we have seen higher energy prices, and with higher prices came increased capital investment, new technologies were refined, and North America’s energy activity has been has been reborn.
It all started with the Nat Gas market, and now we are starting to experience this change in the Crude Oil market.
Prices in Y 2012 started addressing this dynamic change, the real effects of this trend will start taking shape in Y 2013 as storage constraints start kicking in, demanding a re-pricing of the commodity.
And no matter how much the US Fed devalues the USD, unlike Gold or Silver, you can only store so much Crude Oil, and with 700-M bbls in the Strategic Oil Reserves, another 400-M bbls in US Commercial Reserves, how much is really needed in storage in the increasingly energy independent North American Region who’s motorists want to run electric cars?
Only so much storage can be build economically to avert a price drop from continuing over supply, now the world produces more Crude Oil than it consumes each day, and it has done for the past 16 months, this trend will get worse in Y 2013. That being the case I expect Crude Oil prices to begin take into account this over supply issue in the Oil Markets in Y 2013.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.
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