2013 Outlook Commodities Review: Oil

2013 Outlook
Commodities Review

Oil
Michael Wittner

Key points

■ The outlook for oil market fundamentals is neutral through 2013. With another year of sluggish economic growth expected, global demand growth is forecast at 0.8 Mb/d next year, driven by emerging markets east of Suez.

■ Growth of 1.0 Mb/d in non-OPEC supply next year, including OPEC NGLs, is faster than global demand growth. It will be driven by the tight oil from shale in the US and oil sands in Canada. In order to balance the market, and to avoid another large global implied stockbuild like the one projected to occur this year, Saudi Arabia and OPEC will have to cut crude output by 1.0 Mb/d next year.

■ The outlook for non-fundamentals, including risk appetite and geopolitical risk, is also neutral through 2013. For risk appetite, we expect large swings in both directions, with periods of both strong risk appetite and risk aversion. The net result should be, on balance, neutral.

■ For geopolitical risk, significant price support from the Iran nuclear issue and the Syrian conflict is expected to continue from current levels. However, the higher levels of Iran risk seen last summer have faded, after Israel extended its timeline for military action against Iran until next spring or summer.

■ With oil fundamentals, risk appetite, and geopolitical risk all forecast to be neutral, we have increased our 2013 forecast for ICE Brent crude to $110, from $103 previously. This is roughly in line with the $111 in 2011 and a projected $112 in 2012.

■ We have also increased our 2013 forecast for NYMEX WTI to $97, from $92 previously. The new forecast for the WTI vs Brent discount next year is $13, compared to $11 previously. The discount should narrow from $15 in H1 13 to $10 in Q4 13, based on mid-continent to USGC pipeline capacity growth outpacing supply growth.

■ We believe a wide $90-125 trading range for ICE Brent is likely to continue. The sluggish macro growth environment will set the ceiling. Persistent geopolitical risks in Iran and Syria, as well as other surprises, will set the floor.