WTI closed November just shy of $89 a barrel on hopes of an improving economy. I think there is an argument for an improving economy in 2013, but it is just too early to tell how things are going to come together with the economy, and all the ramifications of basically an anti-business and social agenda political leadership of the last four years.
I am not making a political statement that there aren't some benefits to be gained by such governmental policies, more to state the fact that with a lot of the legislative and fiscal policies of the last four years we have yet to fully understand some of the costs and unintended consequences of these policies like higher taxes, increased healthcare costs, and increased business regulation costs.
So this is an area that remains to be seen how all this plays out in the economy. Just last year many analysts were expecting 2013 to be an increased chance of a recession, we shall see.
But even with the best case scenario for a stronger 2013 economy in the US, this isn`t going to effectively change the actual demand picture for Petroleum products in a mature market like the US to any significant degree.
In addition, with the latest employment numbers coming out of Europe and the slowdown finally hitting Germany it appears Europe is not going to have a robust 2013. Asia, namely China appears to be coming off the bottom, but the days of 12% economic growth are over for the emerging market, in short, they have finally “emerged”!
China has infrastructure and inflation constraints that hamper growth levels higher than 7% going forward, and real growth may be much less than reported. This economic reality is priced into the Chinese stock market, which has had an abysmal year.
In regard to Japan, they are about to have another leadership change, the 7th one in as many years, and this economy is in a state of perpetual deflationary decline which has lasted for the last twenty years. So despite the new leadership change, Japan has major demographic and anti-competitive businesses constraints that auger more of the same for 2013.
So the US market, which is a mature market may actually have the best economy of the major economies and users of Petroleum products in 2013, and that`s not saying much from the demand side of the equation.
Now we get to the supply side of the equation, and here is the problem for Oil bulls, and partly the reason so many funds got killed in 2012 trying to aggressively invest in Oil through Futures, ETFs and the like. No established trends could take hold because the supply levels globally and domestically are well above the five-year average, and at the height of that range. So we have had a drop in WTI from $109 to $78 totalling $31 a barrel, and $100 to $84 totalling $16 a barrel which is not good if you’re a fund manager investing long-term.
The most noteworthy trend in the Oil markets for 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 oil in North America.
Well, we are finally starting to see the results of the increased capital investments, and just like Shale Natural Gas, these projects once they get going stay online, even as prices drop substantially. Expect the same for Oil, as frankly, there just aren't a lot of areas where you can make the kind of margins that are attainable in the Oil market. It is a good business to be in versus many other industries vying for capital resources.
Just to give the reader an idea of some of this dynamic change in US production numbers alone, the United States is on track for a 7% increase in oil production this year to an average of 10.9 million barrels per day. Furthermore, The U.S. Department of Energy is forecasting that U.S. production of crude and other liquid hydrocarbons will average 11.4 million barrels per day in 2013. For comparison sake Saudi Arabia's output is approximately 11.6 million barrels per day.
The only reason oil isn't much lower currently is that there has been a lot of increased oil storage for newly built capacity in China and the US. For example, Cushing Oklahoma which is