Brent oil’s third year over $100 looms on supply risk


By Grant Smith & Mark Shenk

Brent crude is poised to trade above $100 a barrel for a third consecutive year in 2013 as tension in the Middle East threatens to disrupt supply and global demand is buoyed by Chinese imports.

Oil will average $110 next year, according to the median of 30 forecasts compiled by Bloomberg, compared with about $111.68 so far in 2012. Brent is more likely to overshoot the 2013 median than miss it as Iran spars with the west over its nuclear program and the conflict in Syria deepens, Morgan Stanley and UBS AG said.

“Risks are skewed to the upside, related to still-high risks of escalation or confrontation over Iran and deterioration in Syria,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York, who predicts Brent will average $110 next year. “The biggest possible surprise for markets could be stronger-than-expected oil-demand growth.”

Rising prices may pose a barrier to a recovery in the global economy amid Europe’s sovereign debt crisis, U.S. budget disputes and signs of slowing growth in Asia. Record revenue for oil producers helped ensure supply stability this year, encouraging Saudi Arabia to pump at its highest rate in three decades, while financing shale projects in the U.S. that fostered the nation’s biggest production increase in 50 years.
Iran Sanctions

Iran’s oil exports have collapsed 50 percent from year-ago levels because of tightened restrictions on sales imposed by the U.S. and Europe this summer, the International Energy Agency said. Daily exports will probably slide to about 1 million barrels early next year, compared with 2.5 million at the start of this year, the Paris-based adviser to consuming nations said in a Dec. 12 monthly report. Barclays Plc predicts that 2013 will be the year when western governments decide whether to accommodate or confront the Islamic republic.

The U.S. will probably seek to bring Iran back to international talks in the first quarter of 2013, renewing focus on the issue and adding to the so-called oil-price risk premium, Michael Wittner, the New York-based head of commodities research at Societe Generale SA, said in a Dec. 21 note.

Prices have also gained on signs that the uprising against Syrian leader Bashar Al-Assad is heightening discord between Iran, a predominantly Shia Muslim nation that has given military support to Assad, and Saudi Arabia, a Sunni-majority kingdom assisting opposition forces. Refugees are fleeing Syria to neighboring states including Iraq, the fastest-growing oil producer this year among the 12 members of the Organization of Petroleum Exporting Countries.
Proxy War

“It is a proxy war,” said Paul Horsnell, the head of commodities research at Barclays in London, who expects Brent to average $125 a barrel next year, the highest forecast tracked by Bloomberg. “It’s operating down the same fault lines that go right through the Middle East, and spilling out into every country that it borders onto.”

Brent has advanced 3.4 percent this year to $111.05 a barrel on the London-based ICE Futures Europe today. The North Sea crude rallied 22 percent in 2010 and 13 percent last year, when it averaged $110.91 a barrel.

Global oil demand will expand by 1 percent next year to 90.5 million barrels a day, versus growth of 0.9 percent in 2012, the IEA predicted in its report. China will account for about 30 percent of the expansion.

OPEC decided on Dec. 12 to leave its official production target unchanged. The group is expected to earn more than $1 trillion in export revenue this year, according to the U.S. Energy Department.
Non-OPEC Supply

Next year’s growth in demand will be met by new supply from outside OPEC, according to Citigroup Inc., which forecasts that Brent will slip to average $99 a barrel next year, the third- lowest of the 30 predictions tracked by Bloomberg.

“Risks are overwhelmingly to the downside,” said Ed Morse, Citigroup’s global head of commodities research in New York, who estimates that current prices are high enough to act as a break on economic expansion.

About 60 percent of the 900,000 barrel-a-day increase in non-OPEC supply in 2013 will come from North America, Citigroup estimates, as hydraulic fracturing, or fracking, allow the extraction of shale oil from rock formations in North Dakota, Oklahoma and Texas.

The boom in U.S. production has triggered a 7.7 percent drop this year in West Texas Intermediate crude, the nation’s benchmark grade. WTI has averaged $17.46 a barrel less than Brent this year, a record discount in annual terms, as new output floods into tanks at the U.S. storage hub in Cushing, Oklahoma. The price gap was $19.90 today.
Brent-WTI Gap

Goldman Sachs Group Inc. said Dec. 20 the spread between the two grades will narrow to $14 a barrel within three months, abandoning a prediction it would end the year at $4. The median of analyst forecasts compiled by Bloomberg are for the difference to narrow to $14.10, as flows accelerate through the Seaway pipeline, which connects Cushing with the Gulf Coast, the location of 50 percent of the nation’s refining capacity.

While the domestic surplus has lowered WTI, which can’t be exported without a government permit, the value of Brent, which is shipped from the North Sea to ports around the world, has been buoyed by everything from the crisis in the Middle East to expanding demand in Asia.

A “reacceleration already appears to be underway in China,” analysts at Morgan Stanley said in a report on Dec. 5. The nation’s crude processing jumped 9.1 percent in November to a record 10.2 million barrels a day, the National Bureau of Statistics in Beijing said Dec. 9.

“The key catalyst for the rise in oil prices we anticipate in the second half of the year will be the economic comeback in China,” Axel Herlinghaus, a senior analyst at DZ Bank AG in Frankfurt, said in a report e-mailed on Dec. 19. Brent will climb to $120 a barrel next year, he said.


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