OUTLOOK ’13: Crude supply stable, but markets set to remain volatile

21 December 2012 10:13  [Source: ICIS news]

By Tony Dillon

LONDON (ICIS)--Crude oil markets are expected to remain volatile into 2013 on continuing tensions in the Middle East and the state of the global economy, but with no real concerns over supply levels.

At its 12 December meeting, OPEC agreed to leave its output quota at 30m bbl/day, a level it consistently produced above throughout 2012.

Nevertheless, OPEC ministers noted that the price volatility witnessed throughout this year remained mostly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions and, latterly, exceptional weather conditions.

The OPEC Monthly Oil Market Report for December showed that OPEC production in November had fallen by 210,000 bbl/day to 30.78m bbl/day with the drop attributed to a cut in exports from Saudi Arabia.

The monthly report from the International Energy Agency (IEA) contradicted this, showing estimated OPEC production in November at 31.22m bbl/day, an increase of 75,000 bbl/day over the previous month.

The IEA report forecast the call on OPEC crude in 2013 at 29.9m bbl/day, down from 30.2m bbl/day in 2012. It also forecast global oil demand growth for 2013 at 865,000 bbl/day, taking consumption up to an average of 90.5m bbl/day.

OPEC showed slightly lower estimates for 2013 with global demand at 89.57m bbl/day and the call on OPEC production at 29.75m bbl/day.

The sanctions put in place against Iran during 2012 as a result of it continuing with its disputed nuclear programme have seen its exports fall from around 3.5m bbl/day at the start of 2012 to around 2.7m bbl/day at the end of the year. The decline is expected to continue in 2013 as new sanctions come into effect, with suggestions that Iranian exports could drop to around 1.0m bbl/day.

However, Saudi Arabia continues to commit to raise its production levels to cover any shortfall in production and to supply its customers’ needs.

A new problem that arose at the December OPEC meeting was a dispute between Saudi Arabia and Iraq as to who should bear the brunt of any production cuts that might be required to support prices should they fall below targets.

Meanwhile, the Syrian regime continues to ignore the wishes of its people and calls from the international community to stand down; civil unrest has again erupted in Egypt as the new Islamist government elected in early 2012 attempts to bring in a new constitution; the ruling family in Bahrain still fails to implement promised revisions to the voting system, leading to on-going riots; and the on-going conflict between Israel and Palestine shows little sign of any resolution.

The economies of the US and China are predicted to show signs of better growth in 2013, but the eurozone debt crisis is likely to drag on. As such, while supply seems to be stable, demand remains uncertain.

Falling production from most North Sea fields is again raising concerns over the viability of the BFOE (Brent, Forties, Oseberg, Ekofisk) marker basket. The January loading programmes for all four grades show just a total of 43 standard size cargoes of 600,000 barrels each, leading to calls for additional grades to be added to the marker basket, but the problem is finding any suitable grades that could add sufficient liquidity.

As it has the lowest quality of the four marker grades, Forties tends to set the market most of the time, but production problems at the 200,000 bbl/day Buzzard field, which is the main constituent of the Forties stream, have created havoc with the loading programmes during 2012 and 2013 and are expected to continued to do so in 2013.

The price of the front-month ICE Futures Brent contract rose from around $110-115/bbl at the start of 2012, rising to a high of $128.40 in March, but then falling to a low of $89.38 in June. It then recovered to spend most of the second half of the year trading around $105-115/bbl, albeit with volatile intraday swings of several dollars.

Morgan Stanley recently lowered its 2013 price target for Brent from $115/bbl to $110/bbl.

Despite the reversal of flow along the US Seaway pipeline to take crude away from the congested, landlocked Cushing, Oklahoma delivery hub to the US Gulf refining region, the US domestic marker crude, West Texas Intermediate (WTI) continues to trade at a hefty discount of around $20/bbl below Brent and is expected to continue to do so in 2013.

The downward pressure on the US benchmark continues to be accentuated by the rise in domestic crude oil production, with the unconventional shale oil as a result of fracking technology and horizontal drilling in Texas, North Dakota and Montana leading the way.

The US Energy Information Administration (EIA) is forecasting oil production in 2013 to rise to 7.1m bbl/day, up from around 6.4m bbl/day in 2012.

With the US Presidential elections over, the controversial Keystone XL pipeline designed to carry oil from Canada and the Bakken shale formation all the way to the Texas Gulf Coast is expected to receive approval. Jobs and less dependence on foreign oil being the battle cry.

By: Tony Dillon
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